Episode Transcript
Rick Watson
Ben Tregoe: [00:00:00] Rick, it's awesome to see you. And thank you for coming on the Banbridge
Rick Watson: podcast. Great to be here, Ben. I'm excited to be on as well. I'm
Ben Tregoe: gonna embarrass you but I really do think you're a God, or at least a demi demigod of e-commerce given your background. It's incredibly
Rick Watson: Can I put demigod of e-commerce on my LinkedIn?
Rick Watson: Yeah, he should. You're up there on Mount Columbus it's uh, Oh man. I don't know about that. . So
Ben Tregoe: just for people's ation Rick currently runs a consulting business focused on helping eCommerce brands. But prior that, he got his start as a software engineer company called Auction Rover eventually became Channel advisor rose through the ranks of Channel Advisor into senior product and engineering roles.
Ben Tregoe: And when you read through that bio, it's like you built so many of the tools that are that became enabled much of what we know of, eCommerce. You did a Stinted Barnes and no. You then started a company called Merchant Tree, which was bought by Trade Shift focus on helping brands, econ brands manage marketplace.
Ben Tregoe: Right? Then you went to Pitney Buzz focused on global shipping, and now you're doing your own thing. So I know I, I glossed over that, but it'd be awesome if you kind of gave your experience just a little bit more depth so people got a real sense of why. I'm putting you on this pantheon
Rick Watson: Of, Demi got, Yeah, no, it's interesting.
Rick Watson: One, one thing, just as a point of quick clarification, I did not start Merchante I was promoted a CEO of Merchante post series A. So I joined as a head of operations and there was already a board and a CEO in place, and the founders were on the board. Still very well connected to Eugene and Eric today.
Rick Watson: But they asked me to run the business after being there about six or eight months. Which I did for then three years and help sell the business with the help of the board as well. But barring that I, yeah, getting into eCommerce was in some ways accidental, kinda. My first love is software.
Rick Watson: Just software of all kinds. I, my master's I got it. So I have these sort of two strange sides to me. One is like very technical software oriented. And the other one is, like I have the side of me that loves being, I love public speaking. So the way that manifested itself was I was in, in college.
Rick Watson: I was the only engineer on a debate. and that kind of summarizes some of what I love to do just generally because if, I can find a job where I'm doing both sides of those things, then I'm, a happier person. And I find that with my consulting firm I, can do most of those because my thought leadership is my marketing and that, yeah, nicely dovetails with me staying being able to be self-employed for longer and longer.
Rick Watson: But I also get to solve. Deep, problems. And I think anyone who's been at a company for a long time I was at Channel Advisor for 10 years and and different companies for longer than a year or two. You know that as a leader, you don't make big decisions every year, right? You really make only a couple of big decisions a year and the rest of the year, you're kind of just making sure that.
Rick Watson: Wheels don't come off the car or something. You decided that was important two years ago, but the seeds were planted long ago. It's not like I'm gonna wake up tomorrow and the company's gonna die if I make this wrong decision because, . If that's the case, then the company's already in big, trouble.
Rick Watson: There better be some momentum happening. And so one of the things I actually enjoy this is not the question you asked, but I'll get there eventually. I think one of the reasons I enjoy the consulting business is because I get to help. CEOs and boards make big decisions every day. Yeah. So every there's no reason you reach out to a consultant unless it's to help you make a big decision that has high stakes.
Rick Watson: To, make a run in the mill decision to, should I do this feature or that feature? Should I expand this product line to get 5% more revenue? That's not an interesting. Decision that you would spend money on a consultant for. And so I, I really enjoy those big [00:05:00] decisions, not only because they're higher stakes, but also because they're complex.
Rick Watson: Right? One of the reasons I really just loved software to begin with is it's a complex space that's changing and, as I grew up in the space Microsoft was the leader and so he was kind of an early person that I followed kind of throughout the eighties even growing up and I had an Apple two was my first, computer.
Rick Watson: But kind of going out of. Grad school I, kind of had the choice of eCommerce, like where, should I go? And really my choice was small company or big company. So I actually could have joined Microsoft as a QA engineer. Wow. And so their QA engineers at Microsoft are like, not a typical qa.
Rick Watson: Their engineers are writing code to test big platforms. Right. Or I could join a small software company in North Carolina that was writing developer tools for Microsoft's applications. Right. Neither of those companies were in e-commerce. It just so happened that the smaller company was founded by Scott Wino, who then later on went to start Channel Advisor.
Rick Watson: Right, right. So I happen to be with the with a group of people whose next idea was in eCommerce, because eCommerce was starting to take off in 99. And I'll be honest, like I, I have nothing but the utmost respect what the channel advisor guys have created. Not the least of which reason is they were first to that market.
Rick Watson: They still today run one of the only profitable SaaS businesses. Out there, like it's very hard to find profitable SaaS businesses, period. Yeah. And Channel Advisor is one of them. Yeah. And not only like the original ideas. Channel advisor was based on Scott had three ideas and each of them became multi hundred million dollar businesses.
Rick Watson: Oh wow. He just picked, one of them was like the idea of a comparison shopping engine. Okay. Back in 99, which is obviously a huge industry like you may have heard of, this entire industry. . Yeah. But the idea at the time was that eBay was big, but it wasn't the only auction.
Rick Watson: Right? They were like, 80. No one remembers this anymore, but there were like a hundred auction search engines. Yeah. Out there for, baby things. And the idea is we wanted to make it easy for buyers to, It was basically we were like a met crawler for auction search. And so along that journey we started developing seller tools.
Rick Watson: So that's, kind of where I started. I was like writing, when I started, I wasn't really on the buyer side. I actually, my, the first code I wrote for Auction Rover was to, was for sellers. And so our target was eBay power sellers. And at the time it was mostly people who had trading cards and be like, whatever it is.
Rick Watson: Once we Auction Rover got acquired by go to.com who invented the paid search engine incidentally, and then crushed, got crushed by Google and like that March, 2020, which is like a month before. Like just another, reason that Scott the management team were, brilliant is they have to be any kind of founder is you realize you have to have a little bit of luck in timing and to sell your business a month before the.
Rick Watson: Bomb bubble burst is pretty great luck and timing, right? But the short story is we were part of go to.com for a year, which was like, so we got to ride out kind of the worst of the bubble burst as part of a public company. So that actually was whole nother funding round. And we kept working on our seller's tools and we found out during that period, Sun Microsystems, which doesn't even exist anymore.
Rick Watson: Signed up for our free auction, so sales tool and sold $50,000 in SPS servers on eBay. Nice. That was really the light bulb moment behind Channel Advisor is like in 2000. Yeah. Was like people, big businesses are gonna use marketplaces to earn a living. That's cool. And, so that kind of just really started the love of eCommerce.
Rick Watson: And I didn't grow up with a father who's in retail. He's in finance. I didn't my mother like, nothing like that. I don't have a retail history at all. My, my history is really is technology. And, a love of trying to figure out hard problems and, eCommerce matched all of.
Rick Watson: Things that I loved doing because it was obviously at the very [00:10:00] beginning of its inception. Yeah. You could even commercially transact on the internet before they passed along if 92 or something. So that's, kind of the genesis of my time in e-commerce and it spend time at software companies but as well as at, brands like Barnes Renewable, helping them build out marketplaces.
Rick Watson: But a lot of my ideas and thoughts that I write about on LinkedIn and my podcast and even bring to my clients and engagements are, just based around having been around the block a few times, right? Having seen a few things. . When, I tell people that I've worked with Amazon before they had a marketplace, most of them don't even understand like how to compute that.
Rick Watson: Yeah. . Which like, what do you mean Mar Amazon didn't have a marketplace? Actually what the marketplace they have today is like their third version of the marketplace and the first two really didn't work very well at all. Wow, I didn't know that. That's Yeah. They had, they actually the, first, Amazon's first attempt, if we're gonna divert here.
Rick Watson: And I'm like totally derailing your agenda. is Amazon Co. Straight copied eBay. They built an auction site. Yeah. And you can go to Amazon auctions and find things. It completely failed because Right. The world didn need another world didn't need another auction site. And so they actually their, second temp was something called Z Shops, which was essentially a new tab.
Rick Watson: To allow like very small brands to set up their own like little mini store fronts on Amazon, but it was not integrated with the rest of the site. You had to go to the Z shops tab and find this merchandise. Oh yeah. So what, Amazon learned from this idea? So this also failed miserably. Yeah. But it got a little bit better because they recognized the importance of providing tools for sellers.
Rick Watson: But where it didn't work is. None of these pages got any traffic. And so Amazon selling these huge books and things, the main search engine Z shops were always at the bottom. And Right. I think the key insight behind the Amazon marketplace was really the, i, the innovation of the product page.
Rick Watson: Okay. Just the idea of having a single product detail page for an item that anyone can win. Yeah. Amazon or anyone else. That was almost a historical accident, and I would say we might even not have marketplaces as we define them today, if Jeff Bezos himself didn't have to override his whole company to make that idea happen.
Rick Watson: Really? Yeah. So if, you read Brad Stone has probably one of the most interesting histories of Amazon and. And we even know back in the day, like most people at Amazon did not want third party sellers to be able to own the product page. It's counterintuitive, right? Like, why would you why, do you want competition on, your site?
Rick Watson: And so I think that idea really allowed third party sellers to gain traffic equal to any other player on the platform. And that was really the innovation that Powers, the rest of everything. All their investments in fulfillment all came, like the genesis of it is kind of back to that kernel of an idea.
Rick Watson: Anyway, happy to be on the podcast. Yes, .
Ben Tregoe: You, set this up perfectly so you know where, are we going now? I know you have strong opinions about this, and just to give a little bit of context it's, clear that e-com has become a system of platforms. Back in the day, you had to build everything yourself, including payment infrastructure, and now there's platforms for virtually everything.
Ben Tregoe: You've been in that, you've worked with the big platforms eBay and marketplaces in Amazon. Like, where are we
Rick Watson: heading? Yeah, I think I think as we're heading forward, I think you're gonna see a little bit more fragmentation. And the reason is because the categories that Amazon doesn't already.
Rick Watson: Are more fragmented and they're not necessarily the same consumer like you and I that are going on Amazon and receiving, I don't know how many Amazon boxes a week I receive, but it's a lot too many. And everyone I talk to has the same response. I get too many Amazon boxes, . So if you're buying chemicals to [00:15:00] power, Warehouse manufacturing process to produce a product.
Rick Watson: You can't go on Amazon to buy it and you never will because Right. Those chemicals are regulated. You need to know who you're buying from. You need to know what use it for, It needs to be transported properly. There are a lot of industries that aren't just selling a shoe and shipping it to someone who could then ship it back to you.
Rick Watson: Yeah. And I think broadly, if I think about the biggest opportunities to unlock. eCommerce value, they're in these ized industries and categories that you and I as a consumer would never think about. But if you and I worked for Boeing Aircraft, yeah, we would see all, we would see all around us.
Rick Watson: You know what I mean? If you and I worked for Ford, we would see all around us, right? Or just pick, literally pick an industry and, kind of go there. There are lots of opportunities for B2B commerce that I think are exciting for the future. That, that yes, they're digitally enabled, but they're also very different from how the past has looked.
Rick Watson: Do is,
Ben Tregoe: B2B commerce a, a good name
Rick Watson: for this? It's. Best name I've seen. Another way the procurement industry. Yeah. I would say rit large comes at this from a different angle. So the com people who are in commerce call this B2B commerce. Yeah. If you're from like the procured to pay space and you deal with like electronic invoicing and how big companies pay smaller companies.
Rick Watson: Kind of that invoicing and, cash cash creation process. Procurement has broadly two big categories. One is direct procurement yeah, basically direct spend. And the other is indirect spend. Yeah. Indirect spend is basically everything you need to buy to run a business, but it's not essential for the goods and services that your, is your core operation.
Rick Watson: Meaning, Okay if, I. If I am a engine manufacturer, right, And I need to have an office, and that office needs to have chairs and desks, right? Those chairs and desks is what they call indirect spend in the procurement industry. Yeah. Now, okay. And indirect spend. I think Amazon could eat most of those categories with either its main site or with something like Amazon Business, which.
Rick Watson: Internally has been eating the long tail procurement for many years. Yeah. The top end of that market, kind of the head of the, in indirect procurement of like very strategic supplier relationships, like if I'm gonna have 25 offices around the world, probably doesn't make sense for me to go to Amazon every time I need a desk.
Rick Watson: It probably makes sense to me to find the best vendor and to negotiate. Like we normally do for big things, but on the direct procurement side, I think is where B is the more interesting part of b2b. So if you have an engine block that has. Let's say 40 parts and each of those parts are produced in different countries.
Rick Watson: And not only to that, they, you also have bearings and you need different fluids and oil and transmission fluid, like whatever. It's like where do you procure those things? That kind of commerce, I think is you, don't you? And I would never see it, but I, think it's also really fascinating. Massive to to, track.
Rick Watson: And it's also massive.
Ben Tregoe: Yeah. Yeah. It let, can we jump? I think you, you're absolutely right, right? B2B is this massive unexplored to be tapped universe. A lot of our people though are on consumer, right. D toc. So I'm gonna hold your feet to the fire a little. What's the future of D to C vis ivi, The.
Rick Watson: Yeah I, think D to C as, as far the platforms, I don't think you're gonna see anything major Earth I don't see anything that like, fundamentally threatens the success of what Amazon does really well and is good at. And conversely, I also don't think.
Rick Watson: The individual direct to consumer experience or the bricks and mortar retail experience by a good retail operator, which is an important caveat for the last thing. There are a lot of bad retail [00:20:00] operators that I don't wanna say deserve to go out of business, but I You're not surprised when they do put it that way.
Rick Watson: Yeah. I think those trends are, One of the most important factors that Amazon be on 20 years ago that some of their competitors did not was the importance of convenience. And really the primacy of, convenience over many other factors. And obviously selection is important too and, good enough.
Rick Watson: Price is important too, but convenience is half the ball. By itself. Okay. And, the company that is the most convenient is, the winner. And I think if you look at the highest growth areas of direct to consumer eCommerce right now, it is, a lot of it is these offline businesses. It's actually these sort of like traditional retail businesses.
Rick Watson: For instance, what is the highest growth area at Target? It's curbside. Okay. Oh, wow. Yeah. It's like powering over half of their online growth. And so the idea between what's direct to consumer Yeah. Targets a retailer. If a consumer is sitting on their phone in the store and they're on their phone and before they walk out and they're on a couch and they, were talking to their friend.
Rick Watson: But they also wanna walk out something and they transact on their phone, but then they go to the back of the store to pick it up. Is that an online purchase or not? Yeah. The answer is who cares? Really? It's not about the channel, it's about the experience. Right? And so I think there, I still think there is a lot of room to run in retail with better experiences for consumers that they value.
Rick Watson: If. Actually ask them and we measure them and we can actually see that they deliver value. It's not gonna be like, Yeah, gimmicks, but I think just the fact that. Just now in 2020 realizing how much of a huge thing something like curbside is now that like anyone who's done it is like, holy cow, I couldn't believe I, I didn't do this five years ago.
Rick Watson: Right, right. And like eCommerce isn't a new thing. Yes. Doing buy up, buy and online pickup in store. But the goal is to make that maximally. Difficult a lot of times. Right, right, right. Like you have to walk to a, desk that sometimes, Yeah, maybe it's in Lowe's, it's in the front of the store, sometimes in the back of the store, you can't find it.
Rick Watson: You, you have to find a person there, Walmart, and tried to make these towers of things that would you would scan a barcode and spit out a package package to you. It's, and so I think there's a lot of. kind of look at curbside and all these delivery areas. This is all supply chain innovation.
Rick Watson: Yeah. In many ways. And so I, think one of the most exciting elements of technology growth. that investors are seeing, and I think brands are having, is just shifting their supply chains from something that's like very rigid. Yeah, I have this stock, I need to sell it to a retailer. The retailer puts it in the store.
Rick Watson: The consumer has to go to the store to learn even what's there. And so that's not a very convenient experience. It's much more convenient if I can shop online before I go to the store so I can make that trip more efficient. Right. Or even if I. If there are three things I want, I'd rather have, them there when I'm walking the door.
Rick Watson: Yeah. And then I can keep shopping. Yeah. And so that, that convenience element, I think the 5% of the industry has figured that out. Yeah. And is doing a good job of it, but I think that 95 still is not. Yeah. And so I, I think convenience will still continue to drive innovation and I, don't pretend to.
Rick Watson: Be able to predict or understand what specifically that will mean for every retailer. But I do believe that convenience will drive a lot of it. I also think that cost pressures will, d will drive a lot of it too in the long term. In the short term venture capital dollars can make up for a lot of mistakes, right?
Rick Watson: Mean meaning I could start a company tomorrow and saying You can buy this pen in five minutes, and I could have it to your house in 10 minutes. Right. The, reality is everyone doesn't need a pen in their house in 10 minutes. Right. And so in, in a three, over a three year period that it will seem like a fantastic idea, but over a five year period it will seem like a [00:25:00] terrible idea.
Rick Watson: And so I think we're getting to the point where the market is starting to, I think just even just beginning now to sort itself out versus what we're, seeing what. The fads in the direct consumer market. Yeah. Versus what's gonna have real staying power because there's not only real brand advantage to having a great experience, but almost equally as importantly important, there's an economic advantage to delivering the experience in that way.
Rick Watson: Right. And it's sustainable to do that because you can do it profit.
Ben Tregoe: Yeah, I think that's you. You're hearing on such an important point there with convenience and I love how you framed it because you know there's this, people jump to oh, free shipping or fast shipping, which. Maybe for their category, the customer really doesn't care about.
Ben Tregoe: Yeah. If you offer it to me, like, why wouldn't I want it, right. Today and for free, but do I really need my ski pants in August? No. Right.
Rick Watson: Tomorrow.
Ben Tregoe: And I, think that has, and it's such a huge part of the p and l that the shipping and the logistics like, so if you could figure out the way to do that more effectively, What really is convenience.
Ben Tregoe: So you're, I think what you're saying is like you almost, if as a brand, wanna have a vector of like, how important is con, what does convenience mean to my customers and where am I gonna live on this vector? Right.
Rick Watson: The competition and I think different if different types of brands. Convenience to meet something different because, Yeah.
Rick Watson: depends on how they are gonna use this product in their life. Yeah. What problems they're trying to solve with your product. It also depends on how considered a purchase is. It and, in some ways making it, the pre-purchase experience needs to be as convenient as the pur the, instant that you buy it, and then the use of it.
Rick Watson: Obviously that's the part that Apple was always so great at, which is Steve Jobs was also fam famous for saying form is function. And so you can't have a usable product that's not actually usable. It can't just look pretty. Yeah. And so you need both and, so I think we're seeing that convenience for a direct consumer brand.
Rick Watson: I, always really love. Brands that focus a lot on the decision making process a buyer needs to go through in order to decide that this product is the right one for me. It's, really, to me, it's like super interesting when brands are focused on that rather than just saying Oh, it's available.
Rick Watson: They should know why to buy this one. Right. Yeah.
Ben Tregoe: Hey, you just switching gears well, a little bit. You had this really interesting blog post, I think it was back in May, you were listening to the Shopify earnings call, and your blog post I think was like entitled I can't Believe they're about to let the Trojan ORs Dinner
Ben Tregoe: And what, did you mean by that? And what, are you, what are the sort of tease out the consequences of that? Cause I thought that was a really interesting.
Rick Watson: Point. Yeah so, I think the question we have is Amazon has this new program called Buy With Prime, and what they're trying to do is essentially an extension of what they started a little bit with Amazon Pay, which is try to expand their reach into more direct away from their marketplace and how can we get a piece of the pie.
Rick Watson: From traditional, direct to consumer sites. And the short answer is we have this huge asset that everyone, at least in North America and a growing potential of people in worldwide knows is Prime. We have this great fulfillment service. Could we convince brands to use our fulfillment service and essentially give everyone else the prime promise?
Rick Watson: Yeah. Meaning meanwhile sell at the same time, incidentally, selling all direct to consumer brands. This our payment and fulfillment services and, generate that additional revenue stream. So I think Shopify is in a tough spot regarding the prevention side of it. In, a manner of speaking, they almost can't really prevent it in that, the technology to do it.
Rick Watson: If Shopify were to be so closed off as to. For it not to be possible. Yeah. Then it probably wouldn't be a viable platform anyway. You couldn't add normal JavaScript on the page and plugins and, be able to put [00:30:00] a headless front end on it, for instance. So there's only so much control as a platform Shopify.
Rick Watson: Truly has. Yes, they can have a turn to service and they can enforce that, That's also a very expensive and potentially even litigious proposition for them. And so I, I think it was a little bit more philosophically that Shopify the, thing I was more alarmed by is not necessarily that they would allow it, because I, think the fact that they allow.
Rick Watson: is almost something that they should welcome because they shouldn't, like if you're a Shopify management team, it's not like you don't. Brands on Amazon. Amazon has a purpose, right? To introduce your, product to new customer, right? You shouldn't avoid Amazon categorically. And, I think that's true of most things in life, right?
Rick Watson: To, just have a blanket policy against it is probably the wrong move. However, it is an indication that this is something that consumers should care about and maybe Shopify I need to pay attention to it too. Yeah. So I, think. The, thing I was most alarmed about was when Toby said on the call that we love what Amazon is doing and we plan to support it like wholeheartedly.
Rick Watson: Yeah. I'm like it if you like, follow the end of that rainbow, I don't think that ends well for Shopify. Right. You know what I mean? Because Amazon is not viewing this as Partnership approach. That's really not how they think about the world. Yeah. For, Amazon, the world is a little bit more zero sum.
Rick Watson: Of course, yes. They wanna grow the pie. Do they think they're gonna be the only retailer on the planet? Probably. No. Your margin is their opportunity. Right. That that's, kind of the motto. Amazon wants always wants scale and they wanna deliver consumer value. And if they can do that at, your expense, they don't care.
Rick Watson: Right. So I, I think I, was a little bit alarmed that Shopify had not thought through its strategy for even messaging how they think about Amazon in the world, other than previously it was like Amazon is the evil empire. That was the messaging outta Harley in particular, Right. And, others.
Rick Watson: And to have Toby on a call. Six months later about the opposite message. Just it, told me something about where they were in their decision making process. Maybe still are. Yeah. And deciding like, how do I, how do we think about this as a firm? I'm quite certain it had something to do with them spending $4 billion on a logistics software company and deliver.
Rick Watson: I'm not certain if it had something to do with them trying to buy a robot company. Three years, Right? Three years ago in, in Six River Systems. But there are a lot of logistics asset that I think are interesting for Shopify to invest in. I think the How is the rub there? Yeah. And as, a software platform that look, most SAS platforms generate you.
Rick Watson: I think their payments business is roughly what, 30% margin. Their platform business is probably something like 50% margin. If, I remember these numbers properly. The logistics business is not those things , right? Yeah. So that, I think that is a big worry for investors. Yeah. If I'm a Shopify investor, like why do I need to own this versus why do I need to?
Rick Watson: Provide these services through partners, right? And so that's really, I think what Shopify is gonna wrestle with really over the next, almost regardless of which dis decision they, they choose. There's no, I would say obviously right answer that has no downsides because I think each, Lane may pick will, have downsides.
Rick Watson: But and, upsides. So that's, to me, that's why it's so fascinating to speculate. Yeah. And comment on that's really helpful.
Ben Tregoe: What other platforms do you think are, Or interesting or that people should be paying attention to. We spend a lot of time talking about Amazon versus Shopify.
Ben Tregoe: What about other marketplaces? There's,
Rick Watson: Yeah, I think other marketplaces I, think a lot of it depends on where you are. [00:35:00] Target in Walmart are obviously, I think, at the top of the list. Yeah. For, a lot of brands. I think after that it falls off really fast.
Rick Watson: Okay. Now, where it doesn't fall off really fast is if you're in a specific category. If you're a lighting manufacturer, like you probably need to be on Home Depot and Lowe's. And is that a, marketplace or not? Is it drop. But they're, likely a retail customer but they also likely require you to drop ship.
Rick Watson: And so I think some of these retail stores are have. Had pretty robust drop ship programs for some time now, and they're starting to push more supply to the drop ship side or virtual inventory side, rather than taking more stock. Right. And so I think you see even some of these bigger retailers developing their own marketplaces, and I think in, categories there's, a strange phrase that I, that.
Rick Watson: I, agree with, but it sounds weird, but like the riches are in the niches. So if you're in a niche of your industry, right? You can't just say in a paragraph like what marketplaces people need to be on, Right? The, reality is do I think do I agree with the software vendors that need to be in a hundred marketplaces?
Rick Watson: I would say almost certainly no. Right? But I think there, There's a list of three or four marketplaces that are probably very important for the average brand. Yeah. But they may not all be the, They may not all be the same. Three or four. Yeah. That makes a
Ben Tregoe: lot of sense. I wanna switch gears a little bit.
Ben Tregoe: We touched on it and you've seen a ton of brands and companies both successful and unsuccessful. What, how did these brands get to profitability? It's, this new, I feel like it's like a new concept for some of these brand leaders, right? Hey, we should get to profitability.
Ben Tregoe: But what what are the commonalities that you see for profitable brands and what are some of the common. Mistakes that
Rick Watson: you've seen people come out? Wow. Usually the commonality for someone that is profitable. So I would say most, I, most brands that have been created in the last five years, I would say as a rule, are unprofitable as a role.
Rick Watson: Okay. There are few exceptions. And, I think the exceptions are someone who identify, identified an underserved niche that they could fill with, a product that they understood why people needed it and they didn't overspend for distribution. They relied on. The natural marketing of the product and didn't just try to grow as fast as possible and knock off someone else's product.
Rick Watson: And so I think the, authentic founders that, really understand their niche I'll be honest with three, three, probably four years ago to me was like peak D to C, whereas D to C was what NFTs were. Eight months ago, right? Gotta get in, deda, gotta get in at every dinner party.
Rick Watson: Like I had friends that were, would openly say which category should we enter next? And here, is the formula. The price point is. Between two and $500 and it needs to be something that's easily manufactured overseas. And I, my product needs to be at a price point of about half of that. And so if I could come out with $150 product, then I could grow really fast and attract investments.
Rick Watson: It was never. The, D to C hype train if, you just put that in a lane was never about profitability. Yeah. It was more about growth. Right. And I think they thought one day that if they could overtake the incumbent they, but kind of famous to the Old Warren Buffet saying is that in, in the short term the stock market is what is it like a perception?
Rick Watson: Yeah. Whoever the hottest thing is, gonna win. But over the long term, the stock market is, a weighing machine. Right? Like the fundamentals do matter over the long term. Right. And so I, I think the idea that a lot of these d TOC brands [00:40:00] were most of, they thought that these old brands don't understand anything.
Rick Watson: But I think after three or four years in business, most of them understood that what these brands had was distribution and profitable distribution. And that really matters because Warby Parker and All Birds and Bonobos and all these folks mostly exited for the value of the investor, the investment that they got, which is you're.
Rick Watson: The value to the world has not been incredibly accretive, right? From an investment ROI point of view. What it, So
Ben Tregoe: when, how fast does a brand get to profitability though? I If it you, made it at the beginning of the past five years. If I'm a founder recent founder.
Ben Tregoe: Is, should my expectation be that I'm profitable on day one? By the end of the first year? Like what, what would be an accept? I know it changes by
Rick Watson: Yeah, To me, three, three to four years is, kind of a reasonable expectation. And I think being profitable for them would be unusual because mostly because of, Upfront expenses, fixed expenses.
Rick Watson: Like you're, a staff and your technology and your marketing, cuz no one knows who you are. Right? And so if you if you look at the p and l and, I know you'll, like this, if you look at the p and l of an average company I get this question like, how much marketing should I be spending?
Rick Watson: At scale, the most people will tell you that marketing should be about 7.5% of revenue right at scale. That's for. A business, On the other hand, if you look at the average SaaS business, sales and marketing is like 40 to 50% of revenue, sometimes even more. But a startup can't spend 8% of their revenue on marketing because they, nobody would ever know who they are.
Rick Watson: Right. No revenue. There's a reason. Yeah. There there's, a reason that venture capital is important for a brand. Yeah. Because you, you need to spend. Literally million, millions of dollars to start a new brand and to, create awareness. But you need to do it in a way that you are attracting repeat customers.
Rick Watson: Yeah. And I think that's a lot. That's the thing that you can easily lose sight of in, in the rush to create a sexy brand. is, are people coming back to me? Yeah. And why are they coming back to me, I would say is as important, if not more important in the long term than getting them the first time.
Rick Watson: And that gets into subscriptions and, reuse and remarketing and, all these things as well. So
Ben Tregoe: how,
Ben Tregoe: do you define a brand? Cause I, would argue, like one of my hypotheses is that the repeat purchase. is a test of whether you have a brand or not. Can you get somebody to buy you again,
Rick Watson: do you think?
Rick Watson: Yeah it's, a good question. Is it a test? I, would say it that's a test of loyalty for sure. Can you have a brand without loyalty? Probably. think that's a case. It's just a matter of degree. Certain brands are more valuable than others because of the loyalty and trust and feelings and whatever they engender.
Rick Watson: Right. There, there's a reason why Nike is one of the most revered brands in the world. There's a reason why Apple even. Three years after Steve Jobs was fired as a CEO, was still one of the most revered brands in the world and had the opportunity to recover because it had some equity there.
Rick Watson: Even if people had stopped buying right there, there was still something to the brand. And so I, I would say, I would disagree slightly. That buying again means that there's no brand, but think in the average consumer category, That means you have a valuable brand. I, would a hundred percent agree with that.
Rick Watson: I would say there was also like some considered purchases, which you don't buy very often. Right. Like a car, Right. Or like a, sofa or, I don't wanna put mattresses or maybe not in this category, but Right. [00:45:00] Anything big expensive. Like you don't buy too often. Like the fence from my house There's a brand or like the windows behind you, like Pella right is, a great brand, but it if I don't buy it in 10 years, it doesn't mean they're not a great brand.
Rick Watson: No. Right. I would say, I would go further in saying it's not just about you buying again, it's also about you recommending, Oh if, we're gonna kind of follow this tray of trail again. It's, what I, I had a, friend of mine tell me this great quote is like What, is a brand? A brand is what you tell someone when they're not in the room.
Rick Watson: That's your brand. Yeah. . Yeah, that's great. And whatever that answer is, you're like, Yeah, I would use these people again, or no, I wouldn't use them again. Whatever it is, it could be a service, it could be a, product. And so I think it definitely applies to d toc. If you're on a, mom's group on Facebook everyone's trying to.
Rick Watson: Products that work for their kids. Right. And it's a hard process. Yeah. To anyone who's, tried to raise a child. Yeah.
Ben Tregoe: Any common mistakes that you see people making in getting
Rick Watson: to profitability? Not tracking it is a big mistake. And, so I, I think from. I think that the, mistake that, so I, I tend to work with bigger companies that are trying to make a transition to direct to consumer.
Rick Watson: Yeah. And the advantage that these companies have prior to going to direct to consumer is that the number of customers that matter is relatively small. They might be selling to Walmart and Home Depot and Lowe's, and those are the, that's 80% of their revenue. Or something like that. And then the 20% is smaller specialty retailers and, things like this, and they don't have that much to worry about.
Rick Watson: And so I think the famous saying that you don't make money when you sell, you make money when you buy. Is generally true because when you're buying or manufacturing that product, You better already know what you're gonna sell it to. Right. And I, think if you're selling to the same person over and over, that can be, it's easier to determine that.
Rick Watson: Right? Because you're not setting the consumer price. Right. You're setting the wholesale Right. Based on your cost of goods. Right. Now the other side of it is direct to consumer. It's just way more dynamic. Yeah. So the market is so much more dynamic that the muscles. And the thinking and the technology and the organization that these brands don't have is how do I know day to day, week to week if this skew is profitable?
Rick Watson: Right. And I think that is an entire. It's a skill. It it's not something that it's not like you were born with this. It's a skill that can be taught and can be learned, Right. If the organization is willing to learn it and prioritize it, Right. But that's not always the case in a brand where direct consumer.
Rick Watson: is something that the sales team is maybe actively fighting against. Right. Which, which, still happens to you. Yeah.
Ben Tregoe: Let's talk about let's finish with, r w Consulting your consulting practice. You, mentioned just a little ago, bit ago, that your core customers tend to be brands that are moving into dac but, who are the right people for you?
Ben Tregoe: What do they look like? Who should be reaching out?
Rick Watson: Yeah, so I, would say there are two types of. Companies that, that mostly reach out to me. And, a lot of it is based on, on, on kind of my background and the types of people in my network that I bring to engagements. One is private equity back brands that are in the middle market Yep.
Rick Watson: That are trying to grow. I would say digital commerce revenue broadly, not just direct to consumer, but also b2b either through a marketplace or through their own direct channels. So they want more digitally enabled commerce with their customers. And it could be through a third party channel or through a direct channel.
Rick Watson: And so when I say the middle market of private equity, that tends to be companies in the range of a hundred million in top line revenue. Up to usually a billion dollars in top line revenue I have talked to, larger brands, but those are generally covered by one of the larger consulting firms. Yeah.
Rick Watson: Accenture, your Deloittes, et cetera. Yeah. That have the scale to, to match that. The, [00:50:00] smaller the, mid-market brands don't have the resources and don't, won't get the best service from one of the larger firms. And so that's a good match. Yeah. For, my size and I would say the 300 million, let's say a, brand has 300 million in sales, don't be intimidated by that number because usually less than 10% of that number is direct to consumer before they meet me.
Rick Watson: Right? Right. And so they might have a, I might talk to a hundred million dollar brand that has a 1 million direct consumer website. And that's, there are still many brands like that, right? Even in 2022. Right? And a lot of it is, Prioritization and leadership and opportunities. And so when those sorts of companies reach out to me, usually it's a new owner.
Rick Watson: It's a new pro. If it's a new owner that sees opportunity. Got it. And a, new CEO comes in who has industry experience, they are product people. Right. They understand where the product gap in the market is for this brand that has some equity and reach. Yep. But they're kind of doing business in an old school way.
Rick Watson: Yeah. . And so they need digital thinking and technology and, new ways of reaching their customers better experiences to reach their buy. So I help them sometimes acquiring businesses that can help them do that. Yeah. I will assess acquisitions for them, but mostly about strategic planning.
Rick Watson: Okay. If you're gonna be this. If you wanna get your fair share, the way it comes to me is what's my fair share of direct consumer eCommerce for this brand? Right. And how do I get, how do I get there? Yeah. And so I, my, what I bring to them is the combination of. A financial focus, which is like, how does your business work and how we're gonna make money from a p and l perspective.
Rick Watson: Yeah. That combined with the customer experience. And so I, to me, that's one of the things that's unique about my firm is I, try to bring both of them at the same time versus just let's just create a great experience and you're gonna figure out if it's profitable now, Like from, No, usually the first thing I do is let's build a p and l.
Rick Watson: Yeah. Oh, wow. And so you. See what is your, path to profitability here and how do you, And one of the reasons I can save three to four years is because if you're a brand that's of any size that has some traffic that you're starting from, that's usually about what I see. Because you're investing in digital marketing, you're investing in, a new tech platform, you, they're an agency to build it for you.
Rick Watson: And. I can add up the costs for them and kind of see that return, on invested capital over time. So that's kind of one major segment. Another segment is software companies actually venture back software companies or, private equity owned software companies. And they're generally. Funded software companies that are making a transition in their business, they wanna amplify their growth.
Rick Watson: Okay? So they wanna go to market in a new way. They want they feel like there aren't in enough deals that they should be in. And so they, they need a new go to market strategy is probably the, easiest way to do. It's like we're, our company is lacking a newer star. We are positioning It's kind of me too.
Rick Watson: Yeah. We have good technology, but we don't know how to tell a story to our buyers. Right. To, get the market excited about what we're doing. Yeah. And so I help them with messaging, competitive positioning, strategy. That's awesome. Kind of. Yeah, things in between. What a normal, I would say, CMO or head of product would do when they're positioning a new firm.
Rick Watson: So the way I think about it, like if I were if, a company comes to me, the way I think about it is if I were to relaunch this company, knowing everything I know today, what would I do? And, how I promote this company so that it's less about the bits and bites Oh yeah, we have this technology and it has ai, but no one cares about those things because otherwise we wouldn't be having a conversation.
Rick Watson: The what the buyers care about is like how, are you solving their problems? And are you caring of, Are you solving a problem that matches the top three priorities of the company? Really. And so if a CEO wouldn't tell their board about your product either, that's okay because you may not be a strategic buy and you could still be a very successful, like MailChimp is a great example.
Rick Watson: Yeah. Hugely successful company, not a strategic purchase. Right. But if you are, a strategic technology purchase that are trying to [00:55:00] routinely get over a hundred K for your software and services for instance, then you better be on the. The short list of the board's priorities, not just the CEO's priorities.
Rick Watson: And how do people get ahold of you? Yeah, people get ahold of me. They can find me online. My website is r w commerce.com. You can also find me on LinkedIn. Just search for Rick Watson, find me there. And I also in the last year I started my own podcast. Great. Yeah, I'm a guest on podcast, so I have a podcast called The Watson Weekly which I produce every week it comes out Monday morning, which is kind of a digest of eCommerce news and, my commentary on it.
Rick Watson: Nice. Thank you,
Ben Tregoe: Rick. This has been really fun. I appreciate you being.
Rick Watson: Thanks a lot Ben.
