The E-commerce Leader

[00:00:00] Jason: the exit ability of e-commerce operations is quite elegant and quite profound, and it leaves people with sometimes wonderful, successful outcomes. Even for what might be considered marginal busy. Or businesses that don’t have a lot of long-term value.
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[00:01:16] Jason: harvard business school, professor Michael Porter wrote an incredibly important book pre-internet that speaks to many e-commerce sellers situations. And in this series of podcasts, we’re going to dive into the book all about strategy and we want to break it down into its component parts. The book title is competitive strategy by again, Michael Porter, Harvard business school professor. We’re going to pull some excerpts from it, some frameworks and ideas, and talk about them. In this episode, Michael, are you ready to jump into this important conversation about e-commerce marketing traps in fragmented industries?
[00:01:57] Michael: Yes, definitely. Sounds very interesting. It was certainly my experience of e-commerce is that, yeah. Fragmented is a good way to describe a lot of markets. There’s nobody, who’s the obvious leader, things come and go, fragmented is the least of it really. Celtic is not the right word, but yeah, fragmented feels instinctively.
[00:02:12] So Michael Porter is famous in my mind for the book. The five forces of starts your, for the concept of the five forces of strategy, which I confess I haven’t read, which is amazing. Cause I love strategy books. Is this a subset of that or is it not really related directly to that?
[00:02:28] Jason: Honestly, I think we’re both a little in the dark on who has, who he is and what his work is, in totality. I don’t know the answer to that question. All I know is I stumbled into this, fantastic content. I was like, okay, I’ve never seen this before. It was post. I think before honestly, 1980 is before I was into business.
[00:02:49] It’s what else? And, but now we’ve got this rich resource from him as he’s outlined these market dynamics that I think we can reapply. So I don’t know if it’s a subset, but nonetheless, we’re going to plow through it and, look at how he outlines the ideas related to fragmented markets today.
[00:03:05] Michael: So just outlined for us. W what are we talking about today? What’s the sort of general topics, so fragmented markets. What does that even mean? And how does that apply to e-commerce in the broadest possible way?
[00:03:15] Jason: Part of his book strategy, this whole conversation, the market dynamics. And so chapter after chapter, he lays out the different scenarios in which markets can be created or the dynamics within them. And so he differentiates between a fragmented market, an emerging. Market or emerging industry, industries in transition from, growth phases to maturity phases, where there might be consolidation and then declining industries, and then find the actually global industries as well.
[00:03:47] All of these different descriptors and types of dynamics have different. Nicole strategies that therefore we need to think about and, and understand, the e-commerce age in the last few years, especially fueled by COVID rapid transition to e-commerce purchasing has really created an, a dynamic in which many of us find ourselves competing in new ways and selling at higher levels and needing to understand what happens in these times.
[00:04:16] Big market forces and dynamics contexts. And how does it apply to our business? So that’s a little bit of the rationale behind what he’s trying to do as he breaks down the different, markets that you might find yourself in as you’re a seller. In, in this conversation, I thought what we might do is pick apart this idea of the fragment.
[00:04:34] Market, because I think it’s probably the most common for us as kind of entry level entrepreneurial level e-commerce sellers, as differentiated from, the Nordstroms or, Costco’s of the world that are selling online. That’s just not who we speak to as a podcast and not who’s in our community.
[00:04:55] So I think this fragmented market framework has really. Applicable to, who we are as a community.
[00:05:03] Michael: That makes sense. And I think that experience that all of us have in everyday e-commerce selling would backs that up, that sort of fragmentation, as you say, lots of new entrance and during the pandemic, kind of new entrance on the commercial, on the consumer side, which is great.
[00:05:17] Some, like my mum made her first Amazon purchase on a pandemic conditions. Mid seventies, social, probably typical of her generation, maybe something of a laggard with technology, but on the other hand, new entrance from the high street guys, finally switching over to e-commerce because they had to say, yeah, you’re right.
[00:05:32] That’s probably been part of the dynamics that’s led to this feeling of fragmentation. Okay. So what are these that we’re going to look at reasons for fragmentation, 12 reasons. I believe so. What is, what’s the first century first?
[00:05:44] Yeah,
[00:05:44] Jason: let’s rattle through this list of 12, and then we can cherry pick out the things that catch our attention or the things that we like and want to go deeper on since it’s a pretty substantial list, but basically this is his list of why industries.
[00:05:58] Fragmented and fractured up and broken into a million little sellers. And there’s so much here that’s relevant to the e-commerce age. So let me just mention the 12th straight through, and then, w we’ll come back and talk about any of them. So the first reason is low overall entry barriers to entry.
[00:06:15] And the second one is an absence of economies of scale. Or the benefits of an experience curve? The third one is high transportation costs, which COVID is fueled, with, incredible, pain. The fourth one is high inventory costs or erratic sales. The fifth one is no advantage of size. When dealing with buyers or suppliers.
[00:06:43] So you really have no economies of scale in terms of the cost of goods. The sixth one is diseconomies of scale in some respects. That means that the bigger you get, the more expensive things become for you. We’ve never talked about that, which is a very interesting idea for e-commerce sellers. The seventh thing is diverse market needs.
[00:07:04] In other words, when buyers are willing to pay a premium for special varieties or, the, they want customization, those types of things. And sellers service them, with those needs, the eight thing is high product differentiation. So there’s, a large. Degree of small changes or little tweaks.
[00:07:24] This is really private label in mass. The ninth is exit barriers, meaning it’s hard for people to exit an industry. The 10th is local regulations. The 11th is government prohibition, or concentration almost I could do opoly or where the government, creates barriers. And, and then the 12th thing is newness.
[00:07:44] Whenever there’s tons of newness in an industry, it becomes fragmented as new people bring new things to the party. So that’s a list of 12 reasons why industries get fragmented in the first place. And I think almost every one of them could speak to the situation of e-commerce sellers. What stands out in your mind as you look at that list, Michael?
[00:08:03] Michael: Yeah, I guess the first thing is just the. Question of w which market you’re in. And the whole phrase that Springs to mind is the riches are in the niches, which one was, makes me wince, because that’s not how you pronounce the word niche, but it’s a useful little phrase. In other words, going sub niche.
[00:08:18] So going for smaller and smaller market, makes sense. It’s taken as a truism and Axiom university true for everyone, but actually, maybe it’s only true. If we are in, and this is why we get in the bigger picture of what environment, where even in what kind of environment we even operating in as e-commerce operators, because that’s true for us.
[00:08:37] It probably wouldn’t be true if you’re selling crude oil. Crude oil is crude. All is commodity, but people make millions every year. If it’s selling it, it’s not true if you’re selling wheat or sugar and yet people make billions in those industries. So I guess that. That phrase probably only applies when we’ve identified that the industry is fragmented.
[00:08:52] So I suppose before I’m even punching into any of those reasons, this sort of makes me reflect on that and say, what are your thoughts? This is what Springs to mind.
[00:09:01] Jason: Yeah, no, I totally agree with that. I think there’s so many of these that we could jump into that are of interest for e-commerce sellers.
[00:09:07] I, I think of, for example, the low overall entry barriers to entry, and it’s almost one of those truisms that whenever you say to someone in e-commerce, Hey, this is a bad idea. You should never do this. Someone will prove you wrong by doing it in a new way. It’s oh, never pick a product off Alibaba and just try to sell it well, unless you’re a Tik TOK influencer, and then you can do it and make me, it’s oh, never do a, never do drop shipping.
[00:09:33] That’s a horrible business. Unless you’ve got a big niche with, a big email list and an interesting niche and it’s a high ticket product, and then you make millions, and I think this low barrier to entry thing is certainly something that keeps e-commerce marketplaces, fragmented.
[00:09:48] It’s just the nature of how the system has worked. There are, so many sellers and that when you go on Etsy, for example, And you look at some type of product. Maybe it’s a wine glasses that are etched or something like that, or maybe some kind of special thing that’s you that you want for your household.
[00:10:09] And you realize how many people, can do that type of thing. So this low barrier to entry ideas fascinate in, it really means that you’ll always be operating in an environment in which the new. I can come in and compete against you with their own creative ideas, energy brand, social media skills.
[00:10:28] And that to me is fascinating. We’ve watched that happen in our little corner of the internet for 13 years and every time. A new person comes in with an interesting marketing approach or strategy we think, oh no. And so I think that one speaks to me because I see it so often, the high transportation cost isn’t even worth talking about because everybody in the, before all this talking about high transportation costs, I don’t think.
[00:10:53] Cover that there’s no new ground there. But I don’t know. That’s just one. Anything else in the list that it catches your eye? I’ll mention another one if you will, but if you want to go back to show,
[00:11:01] Michael: I also mentioned by the way to everyone who’s listening or watching that we are going to do a podcast probably separately, cause there’s a lot here to unpick on common approaches to how we overcome fragmentation. So as you were saying, we’re going to be focusing on the problems. Do they, I guess don’t worry. We will come up with solutions, but yeah, the low barrier to entry thing is a problem for established sellers and established could mean like you’ve been selling for two years and then, you’ve just about gone full time and then somebody else comes in.
[00:11:27] What else strikes me, high transportation costs. The only thing I would say to that, everyone talks about it all the time is I don’t think they’ve seen anything yet. I think that sadly, that’s going to be. Huge as opposed to merely painful. That’s all I would say on that and what that does with fragmentation.
[00:11:43] I dunno. What’s your view of how that applies if transport costs triple, for example, what does that segmentation
[00:11:49] Jason: let’s GTO that out game theory, optimize that out. So let’s say that there are a hundred sellers in one specific sub niche, little of the internet, and they all have varying degrees of financial firepower scale.
[00:12:06] And et cetera, et cetera, what would doubling or tripling transportation costs do to them? The ones with the thinnest margins will be vaporized and the ones that have the biggest. System in place that probably have products across multiple niches or industries, or maybe have products that have high margin that can then carry the water for the products that have lower margin that are destroyed in their economies.
[00:12:33] As unit economics by transportation. There’s a good, interesting question. So what would that mean? What would it mean your market competitors of a hundred people who used to get by and compete and look like they were, a thing, going concern against you? What would it look like they would then that would shrink by having.
[00:12:51] Or even, like more than that. And then what does that mean for sales, velocity and outcomes? Does it mean that markets would rather than being fragmented, become, become more concentrated on a few bigger sellers that have deeper pockets to finance things? I dunno if that might be an interesting, dynamic that we see happen in the near future.
[00:13:12] Michael: Yeah, that’s very interesting. That almost speaks to me. So to say that, it is good that you frame this by saying there are different types of industry for the point of view of, this. Blends, if you like, so fragmented, emerging consolidation, declining, global, and fragmented is what we’re focused on, but what it sounds like you’re saying.
[00:13:28] And I think that sounds like good logic to me. And that’s what I would say, from not personal experience. But my understanding of business history is that indeed consolidation does often happen when the smaller players can’t afford to keep playing in the big players, either buy them out or simply push them out of business.
[00:13:45] By the way, Amazon itself is a great example of that. Isn’t it? That. The internet and e-commerce shopping is reasonably diverse and fragmented, but it’s nothing like as fragmented as it used to be before the advert of eBay, Amazon and Walmart. Whatever percent of e-commerce they take now between them 60%, 65, 70%.
[00:14:01] So it’s interesting that within those platforms or within e-commerce in general, we might see a similar thing driven by say, high transportation costs. I think your thesis sounds solid to me. Interesting. Okay. What are the other things that are striking you as these sort of know reasons for fragmentation?
[00:14:16] Jason: I think there’s probably a whole line of podcast episodes we could do on this phrase. Just economies of scale, the thoughts immediately spring to mind of when I’ve seen clients have that problem. And by that Porter means you have bad, worse economics, the bigger you get, but that happens. Growth waves or in plateau steps, if you will.
[00:14:40] And it clear example is let’s say there’s an e-commerce seller. That’s selling a good, solid product. They figured out how to source relatively well and uniquely with good margin. And they’re selling it on Amazon and they’re making $2 million. And then they come call Jason Miles and say, I want to set up on Shopify.
[00:14:59] And I heard Shopify is a big deal and we want to sell direct to consumer. And, by the time they start talking to Kyle and I and do consulting, conversations with us, they’ve sold themselves on the idea, like Shopify, as we’re going to, imagine if we sell an extra $50,000.
[00:15:14] A month on direct to consumer on Shopify and we’ll have the lists and the data and on. And so they’ve sold themselves into that. And then the reality is frequently when we start to work through that with them, we say, you’re going to need photography. Okay. Photography, we’ll get that.
[00:15:29] You’re going to need somebody to run this website beautifully. So you need a graphic artist. Oh, okay. We’ll get that. You’re going to need somebody to get traffic to this. Website. So you’re going to need to pay for that. Okay. Pay for that. Then you’re going to need the legal and brand related assets that you’d make sure you own those.
[00:15:48] If you haven’t done that. So that’s lawyer time and trademark stuff. And the list of ongoing expenses start to really pile and people are left with the question. And the valley of despair moments of what in the world that we’ve gotten ourselves into. We were humming along with, good sales and good net profit on Amazon.
[00:16:09] And then we tried to scale to something higher and we hit this horrible diseconomy where now we’re blowing all this money on Shopify, that, that scenario. So calm. And, we work through that pain with people and it is a valley of despair because then of course they turn it over. And what happens is they, they start to see traction greater than the expense.
[00:16:33] And they’re like, okay, we’re breaking even on Shopify. Okay. Now our first goal on Shopify made it, our first goal is 10,000 a month or in sales, or maybe, maybe it’s, 20,000 a month in sales. And then they hit that. And then what happens is that flywheel for the direct to consumer sales on Shopify begins to kick in and they start to see the added value.
[00:16:53] The thesis plays out in the direction they wanted or it doesn’t. And they say to themselves, we hate this, we can’t sustain this. We realize we can’t sell, motor oil direct to consumer on our own website or, whatever it is. And they back away and say, this is more for a marketplace.
[00:17:11] Than it is for a standalone website. So anyway, so that scenario by itself is very fascinating to me. And, I think this list provides a lot of grist for the mill in terms of ideas and issues for how e-commerce sellers can find themselves in traps.
[00:17:24] Michael: Yeah. This economies of scale is interesting because the question is whether that’s just going to get worse, the bigger you get, or whether it’s in phases as you implied, okay.
[00:17:31] Changing sales channel. And I would argue business model direct to consumer business model, I think works in different ways. Isn’t it? So it’s the cost of acquiring consumer versus the long-term customer value and how long as long-term and how do you cashflow that versus the more brutal, more direct and simpler business model of marketplace selling?
[00:17:48] So that’s one thing that, so business models differ, but. I wonder whether it’s also a question of, going through certain phases. So I know people who’ve sold the business for seven figures where they had no VA’s note employees, nothing, and they did, or three, $400, a thousand dollars a year, maybe, pre-tax profits, EBITDA, Ste.
[00:18:08] And if they were going to grow to the next level, they would have had to put some employees in there, maybe put, a third party logistics in a warehouse or even on their own. And then I would have expected their percentage of EBITDA to be simply lower. But it would have been a smaller percentage of a bigger figure.
[00:18:24] I wonder whether that goes in waves. What sort of, what’s your experience with that?
[00:18:27] Jason: I think that, I think it is an ROI questions for, plat there’s plateaus. I think it’s steps along the growth curve. And, if you’re, become a big deal on Amazon, And you’ve felt like, okay, I’ve cornered the, my little, sub category on Amazon.
[00:18:43] I know what I’m doing. Then the question is how do you, invest in unlocking new sales channels? And therefore, th this is why the. The e-commerce space is so fragmented is because what you immediately realize is, oh, there was someone else crushing it on Google and direct to consumer on their own website.
[00:19:00] And I didn’t know anything about them because I was focused on Amazon or, somebody else’s on walmart.com already, or someone else’s on eBay doing this well in a different way. And what you come to realize is that those little fragmented markets, you have to go and invade someone else’s territory and say to yourself, okay, can I be a competitive threat to them on walls?
[00:19:21] And do this well. And, and that will cost me time and money and staffing and, the systems process stuff. So I think those are hard challenges, but so common for each of us as e-commerce sellers to have to work through that.
[00:19:34] Michael: Absolutely. The one that strikes me today, which you wouldn’t a few days ago, I listened to a podcast by a guy called Steve Lawson who runs, I think it’s called sales funnel radio, just to credit him with this.
[00:19:44] And he did a little breakdown of four different business models and comparing the gross profit, the overall profit, the. The scalability of the company and comparing things. And it’s really fascinating when you start to put together business models into one business, how the hybrid works.
[00:20:02] So he talks about e-commerce. He said, okay, the profit margin is pretty low. You said, oh yeah, the other thing is revenue. So sales price per unit. So sales generally 20 to 50 bucks for most e-commerce type products. That’s that ties in with my experience. I’ve warmingly yes, there’ll be some exceptions. Info product.
[00:20:16] And they have a pretty low margin, the overall operating margin of the businesses and great. But you can sell them for if it’s direct to consumer might aside at the current stage, he said about eight times EBITDAR maybe it’s even more at the moment. You can even sell an Amazon focused business.
[00:20:30] That’s fairly small for five times a bit dive it’s the right one. Okay. So the exit by. The info product space you can sell, you’re famous, almost a cliche that you could sell a course for $500. It’s very profitable, in gross margins. Amazing. Cause there’s so much it’ll cost with digital products, which you’ve talked about extensively and rightly so the overall.
[00:20:48] Profitability, the business is great, but can you sell it seriously hard to sell because you it’s a brand around one person and that’s really hard to sell. And then the SAS is interesting because it’s incredibly, it can be very expensive. The barriers to entry are pretty nasty, but the profit per an added customer is pretty good.
[00:21:05] Cause you add a bit of service base and you can sell them from incredible miles bully, like ATEX revenue, which is crazy. And then there was one of the business model that I don’t know. Oh yes. Coaching and consultant, which again, has good profitability, pretty unsellable. So it’s very instinct to me how that ties in with this fragmentation piece and exit barriers, because I think.
[00:21:23] I don’t know what your thoughts are, but is a, I don’t know how this feeds in, but porters, exit barriers thing. It makes me think that actually that might be part of why people are coming in because the smarter players know that they can build a business. That’s very sellable, even if it’s not incredibly profitable in the meantime, what are your thoughts on this stuff?
[00:21:40] Jason: Of course, that’s totally what’s happening. And so what you get is this system that we all have watched, which is, somebody comes into the e-commerce. And three years later, they declared themselves as the guru that conquered all of industry. And they’re now expert, they’ve sold their business for $10 million or $20 million.
[00:21:58] And therefore they have the claim to fame and then they started coaching a coaching consulting business. And that’s just so like cliche at this point is there’s so many gurus who you look at and they’re like, how long have you been in e-commerce? Oh, 18 months. I had a successful business in, and then I sold it.
[00:22:14] And I learned so many lessons like, yes, you, you did. I’ve been doing this for almost 15 years now, which is, it is what it is, things come and go, but the reason in their mind they’ve done all of that is because the velocity at which. They can start scale and exit a business.
[00:22:33] So to your point, the exit ability of e-commerce operations is quite elegant and quite profound, and it leaves people with sometimes wonderful, successful outcomes. Even for what might be considered marginal busy. Or businesses that don’t have a lot of long-term value. I think that’s fascinating dynamic of what’s happening.
[00:22:52] So yeah, I, I hadn’t thought of that either, but it is actually a very meaningful attribution to the e-commerce industry that we’re seeing play out and who can fault people and who can criticize them. If you’ve come into a space and you’ve scaled something to millions of dollars. Revenue and sold it successfully.
[00:23:09] And you did all that in 18 months or two years, then we probably do want to learn things from you and you probably do know what you’re doing. You’d probably do have awesome lessons, to T teach everyone and.
[00:23:22] Michael: Johnny come lately is in there 15 years. One of the thing that struck me that he said, which struck me with you as an example, in my mind, the incident take on this, you said that people often will combine, the.
[00:23:35] Info-product thing where you get a very high profit margin, but it’s very unsellable with a SAS, which is, as a software, as a service business, which is hard to get into, or require expensive to acquire some funds, but can be very profitable and extremely sellable. So I know that you guys are getting with Omni rocket you’ve you broadened your remit.
[00:23:52] You’ve now got a software as a service business, as part of the, alive with your information marketing kind of empire that you in Kyla building. So what’s your strategic thinking behind.
[00:24:01] Wrapup: Hello, ladies and gentlemen, thank you so much for listening to another episode of the e-commerce leader. Hope you enjoyed this episode as much as Jason and I did recording it. This can sound like abstract stuff while we’re talking about strategic forces done. I just have to pay the rent or whatever it is that you’ve got in terms of overheads, pay your staff and maybe get some products sold.
[00:24:20] Yeah, that’s true. But this big picture stuff is I think really essential. At certain points. First of all, if you’re looking back in a year’s operations or a quarter or half year, and is it working, is it achieving what you want for yourself, for your family, for your business partners, for your workers?
[00:24:37] But the other thing is this, I think we’re entering right now and recording this late March, 2022. I think we’re entering on a very big global shift in many things, including consumer demand, which may be affected by high inflation. And as you may have heard recently, if you heard my broadcast with.
[00:24:53] Kyle Haimer from Jason. The whole business of the war in Ukraine and all the knock on effects on food prices, oil prices, et cetera. So in this environment, I think the big picture thinking is really critical to help you make decisions about what to keep going with what to pivot from et cetera.
[00:25:10] So today we looked at 12 reasons industries get fragmented, and a lot of those are very relevant to our everyday experience as Amazon or e-commerce sellers, low overall entries or barriers. Opposites of economies of scale, high transport costs. Goodness knows. All of us know about that at the moment, high inventory costs or erratic sales.
[00:25:28] I think a lot of us have had both of those things. No advances of size when dealing with buyers or suppliers that’s. Variable, I would say diseconomies of scale. So in other words, the bigger you get, the more it costs you, they can be quite a thing that people have encountered in my experience, particularly the masterminds, where I see different sizes of businesses and the sort of growth curve over the period of time, four years now, we’ve been working with them.
[00:25:51] So anyway, that’s. The sort of thing that we are trying to promote you to think about probably more questions than answers. Hopefully you enjoyed it. If you have, please, don’t forget to subscribe on your favorite podcast player on Spotify. You can follow the show and you can also rate it. So give us a rating of one to five stars.
[00:26:10] Please do follow us. If Spotify is your place of choice, apple podcast also lets you follow. Or then you worked for subscribe and you can also leave a rating there. You can also leave a little written review. If you’re willing to take that actually 30 seconds, it would mean a great deal to us as we work hard, but a lot of time and energy into the podcast.
[00:26:26] And we would love to just get a little bit of the love back. But the main thing is you want to make sure that we serve you as best we can. And we honestly believe you that the, this strategy thinking. Is going to be very valuable to you, particularly in challenging times. Thanks for listening to the show and look forward to speaking to you on the next one.
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