Agile and Lean: How to Build a $1 Billion Business Without an Army of Employees - DIGITALLY NATIVE RETAILERS ARE DOING AMAZING THINGS WITH THE ...
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Agile and Lean: How to Build a $1 Billion Business Without an Army of Employees DIGITALLY NATIVE RETAILERS ARE DOING AMAZING THINGS WITH THE LEANEST STAFFS YOU CAN IMAGINE. HERE’S SEVEN TIPS ON HOW THEY DO IT.
native brands, in order to continue to grow, actually
Goliath doesn’t look so look to a physical footprint,” she says. “Digital native
strong these days brands are here to stay and I do think, from a growth
perspective, there is the opportunity around physically
opening your own store or boutiques or having some
Traditional retail behemoths are faltering. Former
kind of physical presence.”
giants CVS, Pier 1, Bed Bath & Beyond, the Gap and
other chains have announced more store closings
Yes, relatively small, focused digital-stores are
in 2019 than we saw during all of 2018, according to
expanding. Sometimes called digitally native vertically
Coresight Research.
integrated brands (DNVBs), sometimes digital-native
micro brands (DNMBs), sometimes v-commerce (as in
Global brands like Proctor & Gamble, Unilever,
vertical) shops, these Davids are beating the Goliaths
and L’Oréal, formerly assumed to be permanently
at their own game.
entrenched in the minds of consumers, are being
blindsided by digitally native upstarts who sell directly
For the purposes of this e-book, we are defining
to consumers rather than through distributors or
these small, lean digitally native companies as
retailers.
those with less than 50 employees and more than
$2 million in annual revenues. We will call them
And it’s clear that these upstarts are not content to
digitally native retailers, understanding that they are
rest on their digital laurels. A study by commercial
a segment of a larger group.
real estate firm JLL found that these digital-native
retailers plan to open more than 850 stores between
These small digital-native brands are growing nearly
2019 and 2023. Compare that to the fact that the
three times as fast as average ecommerce retailers,
Sourcing Journal found that legacy retailers are
with the top 75 of them growing at 44% compound
already planning 1,800 store closures in 2019 in the
annual growth rate (CAGR).
apparel sector alone.
Coresight Research tracked 5,524 store closure
Web-only brands grow nearly three-times
announcements last year. And the research firm said faster than total U.S. ecommerce
the number of 2019 store closure announcements are
Sales growth in 2017, year-over-year
already “up 23% versus this time last year.”
Cathy Halligan, an independent director for beauty
retailer Ulta, says there’s a good reason digital natives
are venturing into brick and mortar.
“What I’ve seen that is interesting — and it’s not
quantitative, it’s qualitative — a lot of these digital
44% 16%
Web-only brands Total U.S. ecommerce
market
Source: Internet Retailer estimate and U.S. Department of Commerce
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What is the difference?
What is the difference?
The following chart highlights the differences between the companies we are looking at and
ordinary online retailers: What is the difference?
ORDINARY ONLINE RETAILERS ARE DIGITALLY NATIVE RETAILERS ARE
Generalists Specialists
Intimately involved with the customer
Removed from customers
experience
Employ of hundreds of workers Have fewer than 50 full-time employees
Secretive about their processes and
Radically transparent and open
operations
Source: https://www.iab.com/wp-content/uploads/2018/02/The-Direct-Brand-Economy-Master-Deck-v13.pdf
Surviving on low margins Going for high margins
To earn their multi-million-dollar success, these and other digitally native businesses
differentiate themselves from ordinary online retailers in the following ways:
Growing slowly Growing quickly
1. They outsource anything that isn’t core business and carefully control what is
Losing value over time Gaining value over time 2. They create fans, not customers
3. They embrace radical transparency and authenticity
Don’t consider brand as that important Brand is everything 4. They are experts in a niche market
5. They keep margins high
Rely on third-party sellers Insist on end-to-end control of distribution 6. They collect and know how to use data
7. They are proficient at leveraging alternate marketing channels
Focused on volume sales and Focused on branding and building
efficiencies of scale community
To summarize, to qualify as a digitally native brand, you must sell online, directly to consumers
(no third parties), control your product all the way from warehouse to customers (no
middlemen), and focus on having a meaningful relationship with your customers.
“This [business model] radically transforms the economics of the vertical commerce
compared to ecommerce. Vertical commerce can make money. Ecommerce, not so
much… [But] it takes a fair amount of scale, a wonderful team, and lots of learnings
along the way to turn the corner. ‘Pioneers get the arrows, settlers get the gold.’”
– ANDY DUNN, FOUNDER OF BONOBOS, “THE BOOK OF DNVB”
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INSIDER TIP #1: Outsource anything that isn’t
core business, and carefully control what is.
Digitally native retailers are not in the technology business, despite the fact that they are certainly
aggressive—and clever—users of technology. Because of that, they typically don’t run their own
data centers. They might have an IT guy or gal, but definitely not an entire department. They
outsource all of that.
Other functions are also frequently handed off to outside experts. Although they might have a “Rather than maintaining resources and capabilities in-house, companies
CFO, they probably don’t generate their own invoices or manage their own procure-to-pay cycle. can buy individual supply chain functions as a service on a by-usage basis.
HR and all its various challenges are potentially outsourced, too. Service providers’ great specialization creates economies of scale and
The same goes for order management, fraud protection, fulfillment and sometimes customer scope, increasing the potential for attractive outsourcing opportunities.”
support.
— McKinsey, “Supply Chain 4.0 in Consumer Goods”
Most of this is possible through the cloud. With software-as-a-service and even payroll-as-a-
service and HR-as-a-service, among other offerings available, digital native brands can practically
run their entire operations in the cloud while keeping their headcount lean.
Mary Meeker famously laid out the digitally native retailer playbook in her 2018
This is especially the case with supply chain operations, such as procurement, inventory Internet Trends report. She described a typical digitally native retailer that turned
management, fulfillment, and delivery. to Square for payments, Shopify for platform, Stripe for online payments, Signifyd
for fraud protection, Affirm for consumer financing, Intercom for support, Criteo for
customer targeting and UPS, FedEx and the postal service for delivery.
It is not only the wave of the future. It is the wave of now. Building an ecommerce
stack with operational components that can be assembled, disassembled and
reconfigured like Lego blocks, means retail enterprises can scale quickly and
infinitely.
It allows enterprises to react to changes in markets and consumer preferences by
swapping out parts. It means enterprises can innocculate themselves from being
saddled with technology that quickly becomes inferior or even obsolete. Instead,
they can instantly take advantage of the latest breakthroughs by retiring the old and
installing the new.
All of which means the “how” of logistics and operations no longer has to be a
concern for retailers who would rather focus on the core business.
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Beltology, based in New York, is an $8 million company with just two
employees—its founders, Anna Lundberg, a Swedish graphic designer,
and her boyfriend Andrew Heffernan, an Irish surgeon with a Harvard
MBA. The two make designer belts that have taken the men’s fashion
world by storm. How do they manage that? By partnering closely with
tech companies like Shopify and Skubana, these entrepreneurs are
disrupting the men’s belt business with a digitally designed experience
that gets men the belts they want —and getting noticed by the likes of
Vogue. These partnerships allow Beltology founders to focus on their
So what is considered core business.
core business?
Product (or service) design: This is the most
integral aspect of the business, so it’s done in-
house, always. INSIDER TIP #2: Create fans, not customers
Sourcing materials: Digital natives choose the For digitally native retailers, branding is everything. Think Allbirds, Away, Casper, Rad Power
sourcing of their materials carefully and monitor Bikes and OGs like Warby Parker, Bonobos and Harry’s.
the quality throughout production. Often this
comes with a sustainability story. Sometimes the brand is based on a concept, like cool belts (Beltology), sometimes on an
individual person’s mojo, like Kylie Cosmetics. Either way, your customers are not only
Manufacturing: Although many digital natives customers. They are emotionally attached to you.
don’t manufacture their own products they
carefully choose and manage the manufacturer— Kylie Jenner is the youngest billionaire in history—beating none other than Mark
typically a hand-picked contract manufacturer Zuckerberg, who was the ripe old age of 23 when he hit the magic 10 figures. At 21, Jenner’s
willing to make products in small batches, and to company, Kylie Cosmetics, is bringing in many hundreds of millions of dollars in annual
scale as needed. revenue. And it is the poster child for doing digitally native retail right.
Distribution: No middlemen. They control the The firm, of which Jenner owns 100%, has only
way the customer gets the service or product. seven full-time employees. Its manufacturing and
This cuts costs, and allows digital natives to make packaging operations are outsourced to Seed
quick product changes and strategic business Beauty, a private-label manufacturer. Sales and
corrections on the fly. fulfillment are outsourced to Shopify. Finance and
PR are handled by Kardashian’s mother, Kris, in
Customer service: Since the customer exchange for a 10% management fee.
experience is integral to the brand, this is also
carefully controlled and usually done in-house. Jenner is the world’s most popular Snapchat
personality, and has 118 million followers on
Instagram alone. Her social media fans went into
frenzies whenever she wore or promoted any
beauty or fashion item. So it was only natural
for her to introduce her own beauty products in
2016. She started with a lip liner and some liquid
lipsticks. Inventory was sold out in less than 60
seconds. Since then, the frenzy for all things Kylie
has only continued.
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INSIDER TIP #3: Embrace Radical transparency
and authenticity
Many successful digital natives also open the The chief thing is that the food is made-to-order— INSIDER TIP #4: Be the
kimono to let everyone see who they source from,
who manufacturers their goods, who delivers them,
not sitting in a warehouse. The founder, Kenneth Wu,
calls his firm “an online farmers market.” “That carrot expert in a niche market
and everything in between. The brands that are that you’re ordering is still in the ground at the farm,”
getting it right today are those that are figuring out Wu said in a 2018 interview. “The bread that is being Rather than trying to be all things to everybody,
what consumers want and demonstrating that they delivered hasn’t been baked yet. Everything is to digitally native brands specialize. They’re experts
are aligned with their values. order. After an order is placed, the farmer harvests in what they do. They’re the place that highly
or makes the food for the customer.” specialized influencers go to find out what’s
Take Milk and Eggs, a farm-to-doorstep fresh food happening in that particular niche market.
delivery service in Los Angeles. Operating with As might be apparent from the Milk and Eggs
just 29 employees, it allows customers (called example, sustainability is a big issue when it comes For example, take a look at the luxury watch
“benefactors”) to sign up for subscriptions of to radical transparency. Nearly half (48%) of U.S. industry, which is rapidly being disrupted by digital
milk, eggs, dairy, meats, vegetables and fruits consumers say they would change their buying natives. These tiny watchmakers are independently
on a weekly or bi-weekly basis. All products are habits to reduce the impact on the environment. owned, often run by a single person or a team
sourced from local growers or aggregators, and the According to Nielsen, these consumers are “putting of a few people. They produce watches in small
company offers a 100% satisfaction guarantee. Its their dollars where their values are,” and spent batches of several hundred to several thousand
computer-based delivery system optimizes trips for $128.5 billion on sustainable consumer goods in a year and cut out retailer middlemen by selling
efficiency, saving the many customers’ individual 2015, a number that is growing at a 20% compound online, direct to consumers. Brands like Farer,
trips to the store, and thus minimizing their carbon annual growth rate (CAGR)—four times higher than Autodomo, and AnOrdain are where the latest in
footprints. conventional products — to top $150 billion in 2021. watch design and technology is happening for
people in the know.
To take a closer look at one of these digitally
Sustainable Product Sales in the U.S. “Brands that establish a
native brands, AnOrdain has just eight employees,
$ in billions reputation for environmental
and believes that design and manufacturing of
$150.1 stewardship among today’s
high-quality watches by necessity go together.
youngest consumers have an
$142.5 It uses centuries’ old Celtic techniques to make
opportunity to not only grow
$135.3 its watches, but is acutely aware of the needs
market share but build loyalty
$128.5 $137.6
$142.4 of modern consumers, and of the technological
$125.4 among the power-spending
$123.1 $132.9 advances in the watchmaking business. The
millennials of tomorrow, too.”
$117.1 watches of this Scottish-based digital native
$107.3 (named after a local loch) are so popular there is a
– Grace Farraj, senior vice
six-week waiting list for them.
president, public development
and sustainability, Nielsen.
2014 2015 2016 2017 2014 TYD 2019F 2020F 2021F
Source: Nelson, 2018 The Year of the Influential Sustainable Consumer
Digital natives are thus giving their customers exactly what they want by showing exactly how much
things cost, where they were sourced, and how much profit it being made.
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INSIDER TIP #6: Collect and use data to greatest effect
Because these small but mighty digital natives about how consumers behave on its site. Where
control the customer interaction and experience, they came from. Where they went after leaving.
they have the ability to collect data that traditional What product pages they clicked on. Advanced
brands and retailers could only dream of getting analytics can even tell Hairprint which part of each
their hands on. And, increasingly, they know what web page a consumer’s mouse hovered over. It’s
to do with this data. that granular.
Here’s an example: Digital natives like Hairprint create what some
industry observers call “micro moments,” which are
L’Oreal sells hair color to Walgreens, which sells it those moments in consumer behavior that define
to the consumer. Walgreens may or may not share how and when customers use their smartphones,
what it knows about the consumer with L’Oreal. tablets, or PCs to take an action or make a
INSIDER TIP #5: Keep margins high Hairprint sells its natural hair coloring products
purchase.
Digitally native retailers then analyze the data from
direct to consumers. This small (51 employees) $6.7 these interactions to learn how customers make
Digital natives can achieve high margins on the chain-as-a-service. It gives even the smallest million digitally native startup controls its supply purchasing decisions. This data also helps digital
product in part due to the availability of new companies the advantages of economies chain and customer feedback loop, so it knows natives shape their offerings, and put the right
materials, contract manufacturing that lets them of scale without investing in equipment, exactly what it’s customers are saying, and what content in front of targeted audiences at exactly the
build products in small batches, and so-called processes, and people. Activities that can be they want. More than that, it knows everything right time.
“piggyback” shipping. outsourced include procedure, production
control, manufacturing, quality, warehousing,
According to Andy Dunn, the founder of and logistics. Plus, supply-chain-as-a-service is
Bonobos, in an article entitled “The Book of a pay-as-you-go service. You pay for what you
DNVB,” the product gross margins of digital use, and scale up and down as needed. This
natives are at least double that of ecommerce eliminates the high overhead of having to make
(65% versus 30%). And the contribution margins the necessary capital investments yourself.
can be four to five times higher (40% to 50%
versus 10%). The North America supply-chain-as-a-service
market size was valued at $4.5 billion in 2017
How can these new retailers achieve this? and is projected to reach $7.9 billion by 2025,
Because when you own the full supply chain, growing at a CAGR of 7.5% from 2018 to 2025.
you have more control over costs, and therefore
margins.
Currently valued at Projected to reach
One technology trend that is making these
kinds of margins easier to attain is supply-
$4.5 Billion $7.9 Billion
in 2017 by 2025
Source: https://www.alliedmarketresearch.com/north-america-supply-chain-as-a-service-scaas-market
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INSIDER TIP #7: Use alternative
marketing channels
This goes well beyond using social media to run targeted
ads based on actionable data — that’s a given. Here are
Conclusion
some other methods that digital natives use to market their
wares:
■ Leverage micro-influencers and word-of-mouth “In the consumer economy, we are in the midst of a shift
marketing from a century-old ‘indirect brand economy’ to a ‘direct
brand economy.’ Brands characterized by their direct
■ Push for a viral effect through nurturing early connections to consumers are disrupting the business
adopters and referrals model of market-leading brands, which is leading to a
■ Build communities around product and content, new way of doing business. These direct brands are
especially user-generated content digitally savvy and fuelled by data and will be the growth
engine of the new economy.”
■ Focus on SEO, always
■ Use alternative marketing channels that include – “The Rise of the 21st Century Brand Economy,”
offline events, celebrity endorsements, pop-up IAB, 2018
stores and more
By sticking to some core basic principles, these lean and
Social Media = Ad Engagement Rising mean companies are taking on the larger brands and seeing
(Facebook ecommerce CTRs Rising) astounding growth rates that validate that their approaches
are resonating with consumers.
4%
And in doing so they are providing a valuable lesson: The
3% winners in retail today know, understand and serve customers
in the way they want to be served.
2%
1%
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2016 2017 2018
Source: Mary Meeker Report E-commerce 2018
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About Signifyd
Signifyd enables merchants to grow with confidence by providing an end-to-end
commerce protection platform. Powered by the Signifyd Commerce Network of more
than 10,000 merchants selling to more than 250 million consumers worldwide, its
advanced machine learning engine is able to protect merchants from fraud, consumer
abuse and revenue loss caused by barriers and friction in the buying experience.
Signifyd counts among its customers a number of companies on the Fortune 1000
and Internet Retailer Top 500 lists. Signifyd is headquartered in San Jose, CA., with
locations in Barcelona, Belfast, Denver and London.
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