vertically integrated ecommerce the future of online retail

How does a new ecommerce business compete against Amazon? Amazon overshadows the ecommerce space, has a world-wide fulfillment system, and is ruthless when it comes to squeezing out the competition in markets it decides to dominate.

Amazon is the paradigmatic horizontal ecommerce retailer, selling just about everything that can be sold to consumers. Its fulfillment service is so good that it’s hard for other ecommerce merchants to compete unless they use it too.

Of course, Amazon does have competitors, many of which parlayed existing brick-and-mortar dominance and brand recognition into online sales. But, how does a new ecommerce retailer that isn’t satisfied with being a minor player compete? How does ecommerce businesses scale in Amazon’s world?

One answer comes in the form of vertically integrated digitally native retail. That’s a mouthful but it refers to companies most of us have heard of: Warby Parker, Dollar Shave Club, Casper, Away, BirchBox, Glossier, and more.


What is Vertically Integrated Ecommerce?

These retailers don’t try to sell everything: they focus on a niche with a dominant incumbent – Luxottica in the case of Warby Parker – or industries mired in hidebound legacy markets such as the mattress industry. They design, manufacture, and retail competing products, often at lower prices on channels that provide a direct connection to consumers.

This type of vertically integrated retail business would not have been possible in the early days of ecommerce.

Jeff Bezos wanted to sell books; but it’s unlikely that in the ’90s he could have built a successful business from scratch that could source, publish, print, sell, and deliver books direct to the consumer.

Today, things are different. It is far easier to build prototype products and access large-scale manufacturing than it once was. 3D-printing, maker studios, and rapid prototyping services are available in most cities. Entrepreneurs can approach potential customers for “seed money” via crowdfunding platforms like KickStarter. Marketplaces like Maker’s Row connect businesses with manufacturers. Payment processors like Square and Stripe simplify buying and selling. It’s cheap and easy to deploy a world-class ecommerce store using free software such as WooCommerce and Magento.

Consider the example of selling electronics. It was once expensive to prototype and manufacture new hardware. Now, it is well within the means of an angel-funded or Kickstarted startup. Early stage prototypes can be built with off-the-shelf components and Arduino or Beagle microcontrollers. Anyone with the programming chops can use open source languages and libraries, and there is no shortage of open source design software that cash-strapped startups can take advantage of. Cases and other physical components can be 3D printed. And, once the design is finalized, it is relatively straightforward to outsource manufacturing to cheaper international companies.

And, of course, social media gives vertically integrated retailers a direct line to their customers with incredible brand-building, advertising, and communication tools.

All of which contributes to the flourishing of vertically integrated retail businesses that can scale in a marketplace dominated by a few big retailers. But we shouldn’t forget that although these technologies are enablers, they aren’t sufficient.


Focus on Customers, Not Competitors

The most impressive feature of the businesses I have highlighted is that they are better at what they do than companies that dominated their market for decades. A principle Jeff Bezos frequently cites is “focus on customers, not on competitors”. Rather than looking at the competition and figuring out how to make a marginal improvement, companies like Warby Parker and Casper looked at their customers, asked what they wanted, and used technology to give it to them at a lower price than the less convenient options that dominated the market.

Building a vertically integrated retail business isn’t the only way to grow a successful ecommerce brand, but it is the area I expect to be most interesting and innovative over the next few years.


About the Author: Graeme Caldwell works as a writer for Nexcess, a leading provider of Magento and WordPress hosting. Follow Nexcess on Twitter at @nexcess, Like them on Facebook and check out their tech/hosting blog.

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