A (Very) Brief History of Ecommerce Providers
I’ve been doing this a long time – this ecommerce thing. I built my first website, coded by hand, in 1995. I’ve been selling online since my son was born – and he’s been old enough to legally drink for years. In fact, I’ve been doing this so long that I remember when making an “online shopping” website literally meant borrowing scripting code, plopping it into some static HTML, and hoping for the best.
Having been there when this was all in its infancy gave me the opportunity to grow with it. I can’t imagine what it must be like coming to all of this today and trying to get a handle on it. There was code… then there were programs to help you generate the code. Then there were ISPs that offered their own services to do that stuff for you.
CMS (content management systems) popped up, which was a big deal but they didn’t handle online shopping. That still required adding a “shopping cart.”
Website creation/management systems were judged by their feature sets. What can it do? What can it do that’s new or different? Which new trends does it support? There were literal lists of features. It’s been years since I saw a website platform try to sell itself that way. The list would be enormous, technical, and ridiculous!
Plugins sprouted up to add specific features that weren’t otherwise included, and when that got out of hand, providers began touting themselves as the “all in one” or “end to end” solution.
The Key to Everything
There is still some of that but at this point, most people realize that nothing does it all. Every provider has to pick a lane (it’s an ecommerce platform, period). The categories of providers have settled out. In addition to the ecommerce platform itself, there are ESPs (email service providers), social plugins, segmentation engines, order management systems, tax processors, payment processors, ratings/reviews platforms…
It’s still a lot to take in, and not every business requires every category (especially while it’s still young) but what this means is that the KEY TO EVERYTHING in managing an ecommerce business today is INTEGRATIONS.
A smart Business Analyst friend of mine once described integrations as the connective tissue of a digital ecosystem. Brilliant.
So there are all of these systems, each with its own critical purpose, but it’s the way they connect to each other that really makes everything work.
Customer visits WEBSITE HOSTED BY ECOMMERCE PROVIDER.
Customer places order… TAX CALCULATOR SERVICE calculates tax on the order… PAYMENT PROCESSOR authorizes the payment… order is confirmed and EMAIL SERVICE PROVIDER emails the customer a confirmation message. ORDER MANAGEMENT SYSTEM receives the order, checks it against inventory, and sends it off to the appropriate warehouse to be fulfilled.
This is not a complicated ecosystem. There are a number of other optional services that might have had touchpoints just in this small process. But even in this basic example, we have five providers in the mix, and the commerce platform connects to ALL of them.
The Big Lesson for Tech Investors
That was a long story. If you’re considering investing in technology companies or you’re a private equity firm buying into digital providers, there is a big lesson in it, though:
These providers are not islands. They are interconnected, mutually reliant, and they can make or break each other.
Strategic partnerships are a major focus for these providers – as they should be. But if one becomes known as THE social plug-in for a platform that is about to be purchased, run into the ground, or otherwise outmoded, it’s the kiss of death.
On the other hand, if it hitches its wagon to the next up-and-coming platform, it can be a springboard to massive growth.
Here’s what savvy ecommerce managers already know:
- The #1 ecommerce platform right now will not stay there. We’ve seen it happen over and over. The model will change and they’ll be the “old” way of doing things. Or they’ll do things really right, get lucky, get huge, become just another bloated, slow-moving provider and get lapped in a couple of years by the next lucky up-and-comer. So pick your horse now, invest for the relatively short-term win, and get ready to cash out while always looking over your shoulder for the next one gaining ground.
- Fully researching every category of provider you need is painful. It’s much nicer to find a single, strong provider you like and trust (ideally the platform itself, as it is central to the ecosystem) and prioritize selection of the other providers based on the user base of that core solution. If there are providers who are already pre-integrated for a plug-and-play experience, it’s incredibly valuable (no custom integration)! If the majority of platform users have an ecosystem they already trust, all the better – no guesswork about compatibility issues or complex integrations.
- Replatforming is the WORST. No one likes to do it. The easier that is, the better. Solutions that are pre-integrated with a wide variety of supplemental providers will be most appealing. Think about it – you have an ecommerce platform, the agreement is up in a year, and you need to move. But you still have 8 other providers that are connected within the ecosystem, and their agreements expire at all different times of the year. You can’t just scrap them all with the move. Will they integrate easily with your new platform? Will they play nicely together once they’re connected? A platform that makes that smooth and seamless is gold.
The OTHER User Experience
We digital marketers spend a lot of time discussing the customer’s experience. But we easily forget how much our experience matters. We have teams of people behind the scenes who have to support the business. Are they miserably trying to get different systems to talk to each other, or are they enjoying a well-supported plug-and-play pre-integration? This is a night-and-day difference to digital marketers.
Want to know how users feel about a platform? See if you can find a version of XXXXXsucks.com about the platform. What are people saying? On the contrary, can you find a fan club – a user group that gets together to discuss their ecosystems and how they grow them? What the users are saying is everything!
I consulted a while back for someone who was considering investing in a particular provider. It was a fascinating conversation for me because it allowed me to consider both the user’s perspective (I was using the provider’s services) and the business side. As a user, I felt they had cornered the market in their area of expertise. I had no choice but to use them, and it was not a good experience. I spent considerable effort working to find a solution that would allow me to stop using them.
From an investment perspective though, they were powerful. I hadn’t successfully figured out how to remove them from my ecosystem, and they took a piece of my ecommerce earnings every month. The model was smart and I didn’t see it coming to an end in the near future. In this case, the users themselves were irrelevant. We were frustrated, annoyed, and resentful… but it didn’t matter because we were required to use this system if we wanted to do a certain type of business online. Smart.
Lastly, my suggestion for how to look at this, with a real-world example:
Shopify is arguably the next big ecommerce platform. They have combined the Magento and open-source model of community-created add-ons, with a proper cloud SaaS delivery, offering a large catalog of pre-integrated providers and included services – and they have a reputation for great service and support. All of that is very promising and I suspect they’ll be king of the mountain for a while. If they manage to stay there, it will be an anomaly, but in the immediate future, this is a winner.
But remember that the key is INTEGRATIONS. There is a single email provider that is not terribly well-known in the space, but that the vast majority of Shopify users choose. Watch them – they’ve hitched their wagon to the right platform.
Avalara is a tax calculation service – arguably unrivaled as THE provider for ecommerce taxation (they recently went public). They are not just pre-integrated with Shopify, but with the higher-level Shopify plans, the Avalara tax calculations are included (at no charge). Avalara still has the upsell opportunity for filing and other services, and users have a “no brainer” opportunity to have a best in class solution that feels free.
You can see how this model is appealing. In an industry that started out with the simplest tools and has become a sea of endless providers and services, all attempting to plug into the ecosystem, consume the data, and complicate the integrations, it’s the partnerships, pre-integrations, and plug-and-play connected solutions that will win the day.
Evaluate Investment Opportunities by the Friends they Keep
The good news for investors is that you can follow the trail to find your winners. When you’ve found a provider you like, you’ve done the research and you’re willing to take the gamble on them, make sure to learn about their strategic partners, pre-integrations, and advertised connectors. Guilt by association is everything. Those partnerships can be a red flag for you if they’ve peaked and you see them starting to decline… or they can be a perfect road map for you, identifying your next opportunity without starting over in your research.