No. 345: The Arming Of The Rebels

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Joann King Herring sat across the living room, lively and engaging as ever. I was standing in her world. As a 16-year-old junior at Houston’s Jesuit Preparatory School, I was a lower middle-class outsider thrust into a world that I couldn’t fully grasp at the time. The geopolitical concerns of the 1980s were long past (or so we all believed at the time). But the 70-year-old socialite and philanthropist still carried herself as though she influenced foreign policy, and in the home of a mutual friend in Houston’s famed River Oaks area, Herring still held court. In a small corner of a major city, she was a titan that influenced outcomes a world over.

It was 1999 and, perhaps, the first time that I heard the phrase “arm the rebels.” Herring was a friend to a Texas Congressman named Charlie Wilson and four years after that meeting, their story, Charlie Wilson’s War, would be on the New York Times‘ best seller list [1] before getting turned into a major Hollywood motion picture in 2007. It was a tale about short-term success and long-term failure. It was about doing too little and doing too much. The film covered two American figures who lobbied the US government to fund a resistance against the then-USSR’s occupying forces in Afghanistan.

Now 90 years old, Joann and her friend Charlie armed the rebels over a 10-year event known as Operation Cyclone [2]. As the conflict came to a close, an official of one of the war’s affected countries would later tell the sitting US President, “You are creating a Frankenstein.” There is always an

But Herring and Wilson’s efforts worked over the short term. They armed the rebels and those rebels won. Whether or not the fruits of their labor had a net-positive or net-negative effect on global war and peace will be left to national security experts. The relevancy of this anecdote being used is simple: the act of “arming the rebels” maintained three components over that ten-year span from 1979 to 1989: (1) tools, (2) money, and (3) psychological support.

The rebels defeated a heavily-armed Russian military machine with American tools, American money, and the promise that they had the full support of the American government. This communicated to the opposing military that the money, the tools, and the rebellion would continue. The unbeatable army was beaten by endless supply, force, and psychological warfare.

Shopify and The Arming of The Rebels

Harley Finkelstein on Twitter: “Arming the rebels @Shopify-style, a 3 step guide:1. Create a network of fulfillment centers across America 🕸️2. Allow small businesses to leverage these centers 📦3. Add in robots 🤖Result: Affordable products shipped on a two day cycle to 99% of America. 💪 pic.twitter.com/a6KIptqsbm / Twitter”

Arming the rebels @Shopify-style, a 3 step guide:1. Create a network of fulfillment centers across America 🕸️2. Allow small businesses to leverage these centers 📦3. Add in robots 🤖Result: Affordable products shipped on a two day cycle to 99% of America. 💪 pic.twitter.com/a6KIptqsbm

Shopify has done a tremendous job executing on their corporate rallying cry: We arm the rebels. Having passed Ebay to become the second-largest eCommerce ecosystem in North America, Shopify has maintained that Amazon is next – an unbeatable army in its own right. Once known solely for its role in small cap eCommerce, Shopify now services financial processing, loans, fulfillment, hardware, and an ecosystem of developers at the beck and call of merchants who can afford their services.

Shopify exists to basically arm the rebels. We want a lot of people to go out and compete against Amazon.

Tobi Lütke, founder and CEO

But what happens when you execute on two components – the tools and the money – without the psychological support? The phrase “arming the rebels”, coined by Ruby on Rails creator David Hansson in reference to Shopify’s role in a densifying eCommerce landscape [3], has a hopeful ring to it. It implies that Shopify is punching upwards (it is). But Shopify will also need to punch downwards to maintain its position.

Shopify has investors excited because it is increasingly seen as the most likely challenger to Amazon’s ecommerce dominance. While many retailers, both traditional and online, have tried to tackle Amazon’s “everything store” head-on, Shopify has succeeded by arming individual merchants with the same technology and capabilities, but with more control. [4]

Shopify’s merchants have nearly every resource at their disposal except for one. The company is slow to champion the very brands that use their platform. Out of fear of coming off as partial, Shopify has thus far hesitated to provide the one advantage that could lock brands into their ecosystem for the long term. Yes, one of three components necessary to arm the rebels: psychological support.

The Big Game Ad That Wasn’t

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I waited, fruitlessly, for Shopify’s Super Bowl advertisement. I wanted the brand to discuss – in front of the biggest audience – its evolution over time: the agencies that its ecosystem has fostered, its move into financial technologies, the DTC Era that Shopify’s invention pioneered, and the robots that will eventually fill its 3PLs.

Shopify has armed the rebels by supplying some of them with the funds necessary to operate or expand. Now, it needs to influence the demand curve for the businesses on its platforms. Shopify needs to become an evangelist for its brands.

The phrase “arming the rebels” has a hopeful ring to it. It implies that Shopify is punching upwards (it is) but will also need to punch downwards to maintain its position.

When Squarespace’s Super Bowl ad premiered, it was enough of a threat to Shopify’s market position that the company’s corporate Twitter addressed their smaller competitor in a sequence of tweets that felt somewhat out of character. Shopify is currently trading at a $54 billion market cap; Squarespace remains orders of magnitude smaller, and private.

Shopify on Twitter: “Hey, @SquareSpace we believe in supporting independent businesses too! In fact, there are over 40 businesses in #WinonaMN that are on @Shopify. So we’re going to promote as many of them as possible during the #BigGame. #WelcometoWinona #SupportingIndependents pic.twitter.com/CPq8Ld6Pgl / Twitter”

Hey, @SquareSpace we believe in supporting independent businesses too! In fact, there are over 40 businesses in #WinonaMN that are on @Shopify. So we’re going to promote as many of them as possible during the #BigGame. #WelcometoWinona #SupportingIndependents pic.twitter.com/CPq8Ld6Pgl

Given the market position that Shopify has earned, it’s become clear that Lütke’s position on psychological support must change and it should have begun with Super Bowl LIV. Shopify’s promotional power could reduce insurgent competition while closing the gap with the incumbent company that it is challenging: Amazon. Shopify must evolve into its own marketplace. As customer acquisition costs rise for small-to-middle market retailers, Amazon has become a reasonable partner for retailers looking to increase top-of-funnel awareness. From 2PM‘s A Familiar Strategy:

Amazon is harvesting consumer data to become an efficient vertical reseller. The Amazon products will continue to have the preferred place on product pages. In this way, opposing marketers’ frustrations are founded. It may be true that external brands will continue to be penalized for competing against Amazon’s private labels. The Seattle eCommerce giant seems to be preparing for a day when their data harvesting practices – a process that has spawned countless private labels – will be called into question.

Lütke’s likely opposition to this idea is clear: By selecting brands or products to feature in a marketplace format, Shopify becomes a kingmaker of sorts. A kingmaker is a person or organization with great influence on the value of a candidate. This person or organization uses policy, finance, and competitive forces to influence succession. I contend that offering loans or advancements to merchants is another form of kingmaking. Now that Shopify has begun to market financial products, there is less of an argument to be made. 

Shopify’s moat has been discussed at length: Community and the partnership ecosystem are two buzz phrases that come to mind. But the Ottawa-based SaaS company has drawn the line at promoting the businesses that support the ecosystem; the company rarely pushes traffic and media attention to the companies growing within the ecosystem.

One of the three key resources for Operation Cyclone was psychological support. In the context of Shopify’s use of the phrase, the third resource is missing. If Shopify is comfortable defending its position against Squarespace by promoting independent retailers on Twitter, their management team should also feel comfortable supporting its own marketplace.

In December 2019, Shopify.com saw nearly 47 million visitors with over 40% of the traffic coming from the United States. While official numbers have yet to be reported, the Super Bowl was viewed by over 150 million people. Situated in this audience were potential consumers who may want to start their own company, developers who may want to build for Shopify, and consumers who may want to buy from Shopify.

Amazon, Google, Microsoft, Walmart, Hulu, Quibi, Verizon, and Squarespace shelled out fees to advertise during the big game. However – direct-to-consumer brands were noticeably absent, priced out by the exorbitant costs of doing business. Imagine a $5.7 million, 30-second advertisement that sent tens of millions of Americans to marketplace.shopify.com. When those potential customers, developers, and consumers arrive: they’d see a curation of Shopify’s greatest brands – new and old, established and fresh. Shopify wouldn’t have only gained new customers or partnership prospects. Shopify would have influenced the awareness, growth, and viability for a number of brands that are dependent on three key resources.

In a June 2013 report by the Foreign Press [5], Edward Luttwak lists the five rules for arming the rebels: (1) Figure out who your friends are (2) Be prepared to do all of the work (3) Don’t give away anything that you wouldn’t want back (4) Do not invite an equal and opposite reaction by a larger power and (5) Lay groundwork for the endgame. For Shopify, that endgame involves an emphasis on demand-side economics. For the companies that rely on Shopify’s increasing suite of tools, they must thrive to remain B2B users.

By the end of that evening in Houston in 1999, I conjured up the courage to ask Herring a question or two. I was wearing my nice blue blazer, that night, so I had more confidence than usual. We learned about Operation Cyclone from an alum of the school in one of our courses but it wasn’t yet a widely known story. So on that night, I felt privileged to speak with her before her answers would be honed by Madison Avenue public relations spinmasters. I asked Ms. Herring the type of simple question that a 16-year-old student would: “What did you learn from it all?” She replied with something to the effect of, “We should have given them more and faster. It all dragged on too long. We could have done 10 years’ work in three or four.”

When you arm the rebels, do whatever you can to make sure that they win. They’re fighting for their supplier as much as they’re fighting for their own well-being. After all, their war is now your war.

Read the No. 345 edition here.

Report by Web Smith, Edited by Hilary Milnes | About 2PM 

Member Brief: The Case for Consideration

In the direct to consumer era, “last-click attribution” has overshadowed all marketing reason, it’s become the priority for data-driven marketers. With spend shifting to the bottom of the funnel: Facebook, Google, and now Amazon (FGA) are able to draft off of the contributions of top-funnel marketing channels. In turn, FGA is able to charge premiums for the tangible data that they can provide retailers. As a result, many brands miss the opportunity to reach customers more efficiently. Retail is overwhelmingly ignoring the middle of the funnel.

This member brief is designed exclusively for Executive Members, to make membership easy, you can click below and gain access to hundreds of reports, our DTC Power List, and other tools to help you make high level decisions.

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No. 300: Content Before Commerce

DTC growth efficiency and paying it forward. There’s a relatively new documentary on HBO called Momentum Generation. The short film chronicles a group of young surfers who were pursuing the dream of monetizing their craft (turning pro). They wanted to become professionals at a time when Americans weren’t making a living off of the sport. There is a key point in the documentary when one of the surfer’s mothers professes her appreciation for providing an informal shelter to the motley crew of young men. In her home, they wouldn’t have to worry about food or a roof over their heads. These comforts allowed them to focus on honing their abilities and building their audiences. But it also provided outsized commercial opportunity that wouldn’t have otherwise existed.

If you’ve ever followed action sports, you may recognize the names: Kelly Slater, Rob Machado, Taylor Knox, and Shane Dorian. These are but a few of the household names from that home of then-amateur surfers. The group and its household was credited with defining a sport for an entire generation. They pushed each other, they collaborated, the competed, and they complimented each other’s talents and abilities. It was the perfect storm of opportunity.

Everyone who paid attention to surf media in the 1990s will have heard of Momentum, not because it was artfully made—it wasn’t—but because the 1992 film’s screechy punk/metal soundtrack and hyper-aggressive slash-and-aerial surfing really did announce the arrival of a new generation of young dudes who shredded waves into way smaller pieces than the reigning old dudes. 

Momentum Generation is Postmodern by Accident

What’s the point? We are entering a phase of online consumerism that makes it ever harder to sell, grow, and retain customers effectively. Costs have risen and attention spans have dwindled. One solution that brands often ignore is long tail and risky: building an audience early on. Curating a community and then selling to it. From Issue No. 277 – The Law of 100:

Without a strong group of early adopters, you will not efficiently achieve the attention of the masses. The first 100 are the foundation. Without the support of the 100, the masses will not adopt. Made famous by Simon Sinek, heed the diffusion of innovation theory: the early majority will not try something until someone else tries it first. Brands are judged by this early majority.

A deeper dive into the hysteria around the pioneering group of surfers and you may recognize that this well-done HBO documentary doesn’t get made without the incredible b-roll and spare footage from the shooting of the 1991 short film and 1992 short film, “Momentum.” Produced, shot, and directed by one of the surfers themselves – Taylor Steele, he wanted a way to broadcast the lifestyle. Steele was just 20 years old at the time. His early film work catapulted his household of friends into relative stardom. And then the endorsement deals, media partnerships, and merchandising opportunities followed closely behind.

Content Before Commerce

Neistat’s intentions are largely similar to Warhol’s, albeit updated for the digital age. He laments that NYC has no real community for creators, and what it does have, frankly, “sucks.” Its his contention, however, that this is not due to a lack of energy or creative prowess, but a lack of a central location, a hub of creativity. 368 Broadway, he hopes, will fill that void. “What if,” he says, gesturing to his newly acquired fortress, “this can become the space for all creators?”

On the 368 Project

Brands should consider launching their media and community operations long before their first products hit the shelves. Whether intentionally or not, 368 is doing just that. Founded by Casey Neistat and Paul Leys, 368 is a new age spin on building the creative center of New York City and beyond. With a capable Director of eCommerce and headless commerce capability, 368 has the potential to build a customer acquisition engine. The entire organization is built to systematize the serendipity of its community member; it is a flywheel for creation, content and (eventually) commerce. And it’s an organization that many to-be entrepreneurs in the DTC space should observe.

368 on Twitter

@overtime brought 🏀 to 368 last weekend. They also brought Rachel and Larry.

When you walk into the New York building operated by Casey Neistat, you’ll feel a sensation of serendipity and opportunity. 368 is just a shared workspace to many observers, many of whom view the YouTube star’s business acumen through a skeptical lens. But it serves as more of a creative haven – a place born when its creator believes that the end is more important than the growing pains of its means.

Beme was Neistat’s venture prior to 368. This time last year, CNN and Neistat decided to part ways and you could see the anguish on his face in Neistat’s farewell video. It’s no coincidence that 368 operates within the same walls of the now-defunct headquarters of Beme. Neistat isn’t one to back down from psychological challenges. But the decision to heavily invest in 368 wasn’t just about the physical space; the space is home to competition, collaboration, and community. From our recent Member Brief, The Pivot to Tradition:

For DNVBs to position themselves for scale, it helps to have a built-in audience. Consider the successes of Fenty Beauty (Rihanna’s audience), Kylie Cosmetics (Jenner’s audience), Fashion Nova (Cardi B and 13 million Instagram followers), and Glossier (Into the Gloss).

368 has the make up to duplicate the successes of several of the top 30 community-driven brands in direct-to-consumer industry. One trait that the aforementioned brands share: they are driven by personality and relationships, not performance marketing. As such, paid marketing and advertising costs are relatively inexpensive for direct to consumer retailers like Kylie Cosmetics, Fenty Beauty, Fashion Nova, and Glossier – several of the foremost examples of DTC brands that run without the constraints of skyrocketing customer acquisition costs (CAC).

Wilson Hung on Twitter

1/ The golden era of DNVB is over. The times of inefficient growth enabled by first movers advantage & low ad-costs are over. Rising ad-costs will require brands to focus on operational excellence to maintain strong LTV:CAC ratios to sustain growth.

Adjusting to a dying era

Glossier is the child of Into The Gloss, the website Weiss started in 2010 to chronicle what women had in their beauty cabinets. It may sound simple, but there was a time when nobody curated their collections. For most, a bunch of (mostly expired) products took up all the shelf space.

Woman Made: Emily Weiss

There is a bit of irony in the story of the surfers of the “Momentum Generation”; they didn’t expect the appreciation for their lifestyle to leave the boundaries of their niche. But the content was superior and the lifestyle was appealing, even to those who’d never touch a surfboard. They validated their brand before ever selling a product, sponsorship, or media deal. A casual observer could say the same about Neistat and his 368 team. There is a $90 million / year retail operation that is ready and waiting to exist.

It’s not uncommon for early-stage DTC brands to raise $3.5 million before their first product is sold. These early-stage retailers are often in stealth mode for up to a year, developing product lines, establishing partnerships, and refining their online branding through agencies like Gin Lane, Wondersauce, and Red Antler.

Savvier brands will take this opportunity to build their own flywheels of content, community, and momentum. In doing so, founders have the opportunity to address one of the greatest limitations of this era of eCommerce – head on. Instead of buying an audience, brands should consider investing in growing authentic digital communities around their interests and product categories. Both options – paid CAC v. organic CAC – have their complications; but paying it forward offers sustainability, predictability, and an efficient path forward.

Read the No. 300 curation here.

Report by Web Smith | About 2PM