No. 316: The Rise of “O2O”

In a recent report in the Minnesota Star-Tribune, Jackie Crosby details Target’s latest plan with their recently rebranded media company – Roundel.

Target Corp. does more than just sell merchandise to shoppers. Since 2016, it also has operated a separate, in-house media company that creates digital advertising for a host of major brands and businesses, not all of whom sell products at Target stores.

According to the recently-named president of Roundel, Kristi Argyilan believes that the in-house agency “represents a different way of thinking.” Target serves as a bridge between its customers and nearly 1,000 business partners in a novel way: “We infuse math — the insights and analytics that make our media company successful, with magic — the great, guest-focused design and shopping experiences that differentiate Target.” Roundel develops ad campaigns for Target.com and about 150 digital platforms like Pinterest and Instagram.

Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

The Star-Tribune report noted that the retailer isn’t the only company reconsidering the strength of an in-house media business. Walmart debuted an overhaul to Walmart Media Group in recent months. In addition, Amazon generated $10 billion in advertising in 2018 per the report. With Target, the report indicated, a new advertising identity would show to potential new clients that offerings extend beyond Target.com display ads. For Roundel – data and advertising design aren’t the differentiators, the physical stores are. The agency’s hope is to pioneer the analytics to correctly determine online-to-offline sales efficacy.

Target gets you every time

Most of us underestimate the potential at the intersection of performance marketing and physical retailers like Target. Outside of Foursquare’s private data, there isn’t yet a sufficient means of quantifying the marketing influence that the internet has on the traditional DTC-era consumer who also shops in physical environments. I’ll try to explain with my recent, one-off anecdote.

On a recent visit to Target, I was searching for place mats when I walked past the Quip display along the main corridor. On a mission to spend no more than $30, I felt pulled to the display like a tractor beam. Without the physical display, a Quip purchase would have remained a long-term “maybe.” As such, I disregarded my $30 commitment and picked up a Quip box. But this funnel began long before that walk past the display of battery-powered toothbrushes.

Observations:

  • Awareness of the product: I’d read about it in tech media and retail publications (top funnel), I’d seen the product in searches (middle funnel), and I’ve passively noticed a few retargeting advertisements over the past several months. None of this visibility moved me closer to the sale.
  • The packaging design: structurally unique when compared to the incumbent brands like Oral-B, Philips Sonicare. The box, itself, was taller. Target stockists have no choice but to place the product on the top shelf – prioritizing the Quip over the likes of traditional devices.
  • Branding: The colors popped and the design was superior, because the incumbent devices all possessed some variation of blue and white packaging.
  • Value: The price was 30-60% cheaper than the conventional, powered toothbrush.

Familiarity, appeal, and price were factors in my decision to purchase. But Target isn’t the only retailer that is competing to develop an O2O-capable, in-house media business. Walmart has overhauled its team – with the anticipation of a long period of growth. And Amazon generated $10 billion in advertising in 2018. Display advertising through Target, Walmart, and Amazon has been used to offset the rising costs of traditional advertising services like Facebook and Google. We expect this to grow. Digiday+ recently surveyed 71 media buying executives in March 2019. Nearly 80% anticipated increased spend on Amazon.com, 20% of the executives were planning to spend more on Walmart.com, and 14% were scheduled to spend more on Target.com through their reinvented advertising house.

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Target is a retail marvel, you walk in for one $20 item and you leave $140 poorer. There isn’t a brick and mortar retailer that is better for certain DTCs. It’s the ultimate retargeting ad.

Fostering DTC brand relationships has been a strategic advantage for the Minnesota retailer; no marketplace retailer has more of them. There are few companies with DTC recruitment initiatives to match Target’s recent partnership speed. The retailer selects rising brands, markets them with prime real estate, and presents great products within an environment known for soliciting impulsive purchases. Even so, the largest DTC brands have taken the digital-to-physical sales funnel into their own hands.

The online-to-offline Sales Funnel

In No. 272: A Path Forward, I discussed the positives of DTC brands operating within existing retail developments, improved sales potential, foot traffic KPIs, and the decline of Tier B and C malls.

There are 1,100+ malls in America and approximately 320 are graded Tier A. We have an oversupply of malls but that does not mean that traditional, anchored shopping centers no longer have a place in modern consumerism. Tier A malls have yet to see their best years. We expect their footfall traffic KPIs to grow, while B and C tiered malls continue a drift toward repurposed real estate.

O2O or “online-to-offline” commerce is a strategy that develops consumer affinity through digital channels and then brings consumers into physical settings to purchase in-store. The brand treats online and offline channels as complimentary offerings. The advantage of this model is three-fold: these retailers can assess consumer behaviors, share payment information between online and offline channels, and targeted consumers can be served at the top of the digital funnel for eventual offline purchase (or vice versa). Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

We compiled a list of 14 brands that have publicly reported revenues in the Top 1000 and one retailer who has yet to publicly report revenue. The following DTC brands have almost exclusively avoided marketplace wholesale deals in exchange for focusing on direct sales through physical locations.

[table id=43 /]

Whether through advertising agencies like Roundel or through their own channels, these brands have benefited from a growing means of commerce: online-to-offline. With the exception of Casper, which is partially owned by Target, these top digital natives have insourced all brick and mortar sales to their direct channels. As the ability to attribute sales improves, we anticipate an increased use of O2O for customer acquisition. For performance marketers who are judged by conversion rates and return on ad spend (ROAS), O2O is a welcomed opportunity to develop new methodologies for sales attribution and new advertising models to increase targeted foot traffic for retailers straddling the digital and the physical.

Read the latest curation here.

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No. 306: Platforms and Halo Effects

The commerce platform report. The term “halo effect” was first coined by a psychologist in 1920. Edward Thorndike used the moniker to describe the methods that military officers used to assess the performance of their soldiers. These assessments often revealed little variance across the categories of performance. Either the soldiers were good or bad; few performance evaluations noted “good” performance in one respect and “bad” performance in another. It is said that the halo effect is influenced most by a person’s first impression. If we see them as bad, they can do no good. If we see them as good, they can do no ill. Today, this phrase is most-often applied to brands and their equity.

The halo effect is a type of immediate judgment discrepancy. It is the tendency for an impression that is created in one category to influence the opinions of impressions created in another category.

Shopify is seemingly everywhere. In December, Digiday’s Hilary Milnes reported that Shopify’s ecosystem of 20,000 partner developers generated $800 million in agency business in 2017. It’s estimated that Shopify’s partners (several of whom are mentioned here) will earn north of $2 billion in revenue in 2019.

To build a Shopify-like eCommerce platform is not hard to do. What’s very hard to do is replicate the partnership ecosystem and the value they drive. It’s their moat. It’s not the software — their competitive advantage is the partnerships.

Jay Myers, VP of Growth at Bold Commerce

The halo effect of Shopify’s ecosystem will not be easily combated. With many of the partners becoming standout B2B brands themselves, Shopify’s group of independent eCommerce agencies serves many functions: recruiting, evangelizing, and perhaps a bit of espionage – often relaying word of advancements and initiatives proffered by competing platforms. This brand halo effect is amplified thanks to the era of the direct to consumer (DTC) brand.

2019: top commerce providers that DTC brands are looking to for partnership | Source: Cloudways

The brand appeal and staff architecture of this cohort of internet-first companies are keys to understanding why so many challenger brands instinctively select Shopify. Though not a Shopify Partner, Gin Lane’s “work” page notes the many digitally native brands that they’ve steered to the platform. These names include: Harry’s, hims, hers, Sunday Goods, Ayr, Stadium Goods, Rockets of Awesome, Cadre, Recess, alma, Smile Direct, Dia & Co, Warby Parker, Everlane, Quip, Shinola, Bonobos, and Shake Shack. Similarly, Red Antler’s “work” page boasts partnerships with Burrow, Casper, Allbirds, Brandless, Crooked Media, Snowe, and Boxed. These brands, which skew mightily towards Shopify and Shopify Plus, serve as media darlings and public relations fuel.

Tobi Lütke on Twitter

I usually don’t highlight financial milestones here, but this one is worth mentioning: As Shopify passes the $1 billion-dollar revenue mark it does so with the highest growth rate of any SAAS company ever. 🎉

In this way, Shopify’s halo effect extends beyond the agencies with whom they partner. The challenger brands, themselves, become recruiting vehicles for like-minded companies looking to build brands from zero to one. As such, newer companies like Great Jones follow the same branding methods and staff architecture guidelines

On DTC Brand Architecture

It’s common for digitally native brands (DNVBs) to go to market with over $3 million raised. This pre-revenue war chest affords companies an early branding and public relations prowess that almost guarantees seven figures of revenue in the first year.

Partnering with a Red Antler or a Gin Lane can cost a brand up to $400,000. There are often added developmental costs that these challenger brands will have to incur. In addition to the cost for the brand standards, messaging, and the essence of the brand, the right PR contact can cost a young company another $180,000 to $240,000 per year.

No. 297 The DTC Industrial Complex:

There is an entire eCommerce branding industry that fosters the ideation, launch, and early growth of direct to consumer (DtC) brands. When you notice a new digitally vertical native brand in 2018, there’s a platform aura around many of them. First you’ll notice the early PR sensationalism that they can only garner if they graduate from the right school or leave the right corporation. Then, the founders must live in the right city, have the right investors, and pay the right $25,000 per month public relations retainer.

The challenger brand CEO is very well-educated and, at this stage, CEOs tend to start the brands post-business school. Founding teams tend to begin with some combination of a product developer, finance lead, and a customer acquisition lead. Software engineering is an afterthought for many of these young product companies; this competency is often outsourced to a partnering agency. Universally, the priority for challenger brands is two-pronged: (1) making a great product (2) find an efficient way to sell said products. This often reduces the urgency to partner with technical founders or hire early, technical employees. Whereas F = founder, B = early branding, and P = early product development:

F(marketing) + F(finance) + B(outsourced) + P(outsourced) = DTC founding architecture

Shopify’s ecosystem appeals to this particular architecture. The Ottawa-based company’s continued growth depends on their management’s ability to increase the percentage of challenger brands that grow into enterprise clients. And from enterprise clients to Top 1000 online retailers. Shopify’s volume-driven style of business is a mark of its commitment to small business retailers. But it’s not the only method of accelerating enterprise growth. There are several commerce platforms with notable gross merchandise volume (GMV) across their enterprise level of clients.

The Platform Landscape

From BigCommerce to Oracle and Salesforce, the DTC era of retail extends beyond the brands that are the most talked about in design, tech media, and public relations circles. Here is the data on the top nine by gross GMV. While Shopify generates the most media buzz in small business circles: Adobe, Salesforce, and Oracle are quietly leading the enterprise+ business. BigCommerce is often viewed as Shopify’s younger sibling, however their enterprise clients now generate a gross GMV of 2.5x Shopify’s enterprise clients. The following data is derived from a recent Digital Commerce 360 report (2019):

[table id=37 /]

The platform ecosystem is vast. Of the top 1000 retailers, the majority of brands are built in-house and on custom platforms. Nearly 450 retailers have outsourced their technical capabilities to these nine companies. Moving forward, we will likely see platforms like Adobe building tools and an improved halo effect to address Shopify’s key audience and vice versa. Shopify will build tools to address more of the needs of top enterprise plus clients, as well as continuing to support the needs of the DTC brands that are adopting physical retail channels.

Specializing for a particular segment of the SMB to enterprise to enterprise plus spectrum may have dire consequences for platforms in this increasingly competitive space. As Shopify has shown, there is value in building early loyalty. Shopify is counting on a number of their industry-leading number of DTC and SMB retailers moving through the funnel to enterprise services. Additionally, Shopify’s reach grows as brands transition to Shopify from Magento or custom builds. A trend that the Adobe acquisition of Magento has potentially impacted. This continued growth would begin to tip the enterprise / enterprise+ GMV scales in their favor.

Commerce platforms advertise new capabilities with the idea that the technical merits of a platform, alone, will attract new business. To this effect, many of these platforms have deprioritized brand marketing superiority and influential partnership development in favor of technical product development and traditional advertising. Whether or not the improvement of competitor platform capabilities will outlast Shopify’s hard-wired brand loyalty remains to be seen. Objectively speaking, the sheer volume and positive brand association plays in Shopify’s favor. As does their halo effect.

Read the No. 306 curation here.

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