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.

Report by Web Smith | About 2PM

No. 296: The Idea of Recess

recess.png

Imagine knowing that your brand will eventually play “chicken” with the Coca-Cola Company. For the founder of Recess, that seems like an inevitability. While 2PM, Inc. doesn’t boast a podcast for retail founders, we’re on the horn with CPG and DNVB investors and founders each and every day. One conversation with Ben Witte and you’ll leave it feeling at ease. The CPG founder has a plan and if he has it his way, Coca-Cola won’t deter the brand that he’s building.

Coca-Cola is looking at pitching cans of cannabis-infused wellness drinks to consumers in the latest bid by a big beverage behemoth to tackle the budding market for potentially potent enhanced potables.

“Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world,” the company said in a statement issued in response to a report from the Canadian BNN Bloomberg new service.

Coke Eyes Cannabis Fueled Wellness Drinks

BevNet, the authority on the CPG beverage industry, lists nine competitors in the CBD-infused drink space. Two of them, Dirty Lemon and Recess, couldn’t be more different. But to newcomers to the CBD product space – it’s difficult to tell, early on. To remedy this, I purchased CBD-based products from both of the brands and tested things on my own:

2PM, Inc. on Twitter

Upcoming: 2PM’s first CPG / DNVB “head to head”. @BenWitte’s Recess vs. @drinkdirtylemon’s CBD. We assess the “end to end.”: purchase process, shipping, and product.

Both products were great. Where Dirty Lemon succeeded in logistical prowess and speed, Recess succeeded in product efficacy. Founded in 2015 by military veteran turned industrial engineer Zak Normandin, Dirty Lemon hit the shelves in 2016 with a focus on several aids to wellness. Here’s Normandin on the recent Loose Threads podcast:

Just one on launch: the Charcoal. And then we launched Collagen and Sleep as well, in 2016. And then in 2017, we launched Ginseng and then in 2018, we launched Rose Matcha. We’ve had a lot this year. Rose Matcha, CBD, the Vogue beverage. Yeah. And then we have Turmeric that we just released as well. So that’s the last one and we’ll do one more this year in December.

Beyond what you see, there isn’t one additional mention of “CBD” in Normandin’s interview with the Loose Threads founder. And that’s by design. Despite the incredible popularity of the Dirty Lemon CBD drink or the drink’s role in helping it leap from pop celebrity to practical mainstream, Normandin is essentially tasked with disavowing CBD until the deal finalizes with Coca-Cola. Looming in the background is Senator Mitch McConnell’s hemp legislation within 2018’s Farm Bill. Without this legislation, full spectrum CBD will effectively remain an illegal additive to mainstream beverages.

Shortly after I experienced Normandin’s innovative text ordering process and pleasing customer service, the CBD drink was effectively discontinued (for the time being). Sure to be lucrative, Dirty Lemon is the type of beverage brand that Coca-Cola or Pepsi would wildly bid for. It’s well branded, the following is loyal, and it has star power.  This in addition to the product being pretty good. Coca-Cola’s investment into Kobe Bryant’s BODYARMOR drink is the closest analog to what Dirty Lemon hopes to realize. After the brand’s recent deal with the NCAA, Bryant is one step closer to realizing an acquisition.

Consistent with our strategy of incubating bolt-on M&A deals, we believe taking an initial minority stake today, with a clear path to ownership, will allow BODYARMOR to continue to grow the business in a sustainable manner while maintaining the brand’s leadership and edge that have made it so successful.

Jim Dinkins, President of Coca-Cola

From Issue No. 282: Instagram’s CPG Problem (a deep dive into the CBD industry)

CBD, short for cannabidiol, is growing in popularity among beauty and health consumers. It’s a THC-free substance known for treating everything from muscle relief to insomnia. In June, the first CBD-based drug won FDA approval for epilepsy treatment. And as it relates to this article, CBD has been popping up in high-end skin care products. But Facebook and Instagram’s rules have been uneven at best and it’s causing quite an issue in the CPG space. It falls under Facebook’s prohibited content category.

In October 2018, Business Insider reported that Coca-Cola was mulling a Series A investment into Dirty Lemon. And according to federal laws, inclusion of CBD is considered illegal, unless expertly extracted from the right part of the cannabis plant. To achieve this takes quite a bit of research and expertise. One that Dirty Lemon was unwilling to invest in, for now.

With the closing of its new round of funding, Dirty Lemon will undergo a significant rebranding, the people said. While most of the company’s rebranding efforts aren’t apparent just yet, Dirty Lemon’s CEO Zak Normandin tells Business Insider the company is discontinuing one of its most popular products: its CBD-infused beverage.

Business Insider: Prime

But despite the incredible upside that Dirty Lemon has waiting for it in the realm of CPG acquisitions, it’s Recess that has the potential to become a transformative wellness brand. While Dirty Lemon is focused on holistic wellness with use of elements like charcoal and collagen in its drinks, Recess seems to provide a better “why” through its early branding and multi-platform content. And given its relative youth, it needs all of the help it can get.

If you try to order a case of Recess, you’ll find that it’s backordered four to five weeks. The brand’s launch and ensuing public relations tour was meticulous but Witte seems to be playing a long game (straight out of 2PM’s “best practices” handbook). Witte isn’t building a beverage company like Dirty Lemon, he’s building a platform. Much like Glossier isn’t just a makeup company, the plans for Recess are so ambitious that it might just make sense. Like Glossier and its media arm: Into the Gloss, Recess seems to be taking on the tough task of educating its consumers on the why’s of the more adult-like form of recess. Remember elementary school everyone? We don’t stop to breathe, anymore.

Screen Shot 2018-11-19 at 2.25.39 PM
American usage of the word “recess” over time (1880-2008)

While Normandin and Dirty Lemon have temporarily stricken mention of the substance from interviews and pitch decks, you won’t find the acronym “CBD” on a single can of Recess either. To Witte, the brand is bigger than the three letters. His product offering is suited around addressing productive ways for overworked consumers to value calm, balance, and clarity – despite increasingly hectic lives. For consumers who’ve sidestepped any and all forms of psychoactive substances, Recess is tasked with normalizing its productivity and safety.

Dirty Lemon’s scene is built for leisure, Recess is more grounded in the day to day.

And to this end, Recess may be experiencing a bit of serendipity. Known as a “deeper metric”, there is a growing cohort of health conscious entrepreneurs and professionals who’ve adopted the use of HRV (heart rate variance) as a tracked measure. Popularized by Whoop and available on the most recent Apple Watches, the analytical measure was intended to quantify a person’s physical recovery after sleep.

To achieve 80-90% recovery – despite external stressors, physical fitness pursuits, and shallow sleep – many entrepreneurs are adopting CBD oils and drinks. The goal: address the perception of physical, emotional, and mental stressors. To many, the Recess brand may be the most welcoming option on the market.

We all have too many tabs open in our browsers and in our brains. That’s why we made Recess: each can is a moment to reset and rebalance. It’s how you wish that 2PM coffee would make you feel.

The copywriting on Take a Recess homepage says it all. Witte’s recipe of hemp extract and adaptogens may (or may not) be like anything else on the market. But if it’s up to him, the education and entertainment that the company will provide potential consumers will be unparalleled in the CPG beverage industry. And the potential of his Glossier-like “content and commerce” strategy will provide quite the platform for further product differentiation and expansion beyond cans or bottles.

Read your curation here.

Report by Web Smith | About 2PM