The Trouble with Startups Exploiting Impulse Decisions
Layoffs at Lot18, ShoeDazzle in “hail mary” mode, departures and whispers of tough times at Beachmint.
These are three of the hot e-commerce companies of 2010, that raised a lot of money from great investors and built a lot of buzz. It was a time when hot, “innovative” business models brought new energy into an otherwise stale e-commerce sector. Some models failed quickly (e.g., co-creation, penny auctions, etc), but others have lasted a bit longer (e.g., flash sales, subscription).
But as we’re seeing now, even the latter of these business models is faltering. Why? High customer acquisition costs? Poor branding? Competition? Each is probably somewhat true, but I believe the core of the issue is that these startups depend on consumers making impulse purchases. Must buy that bottle of wine now, even though I don’t need it, because the sale will run out. Must sign up for this service, because JT is says so.
By and large, flash sales and subscription models aren’t the normal way that consumers shop, and when consumers buy impulse, they have a higher likelihood of being disappointed when they receive their shipments or shortly thereafter, and thus have a higher likelihood of not repeating a purchase (or quitting a subscription). Thus, the dollars spent to acquire that customer upfront don’t pay off against a low customer lifetime value. So these companies will see great traction, but it’s not so clear that revenue is destined to grow.
So Lot18 pivoting to subscription? Eek.
Before I close, I’ll throw out two caveats. First, I think there’s still value in these companies - Lot18 does provide a valuable curation service to some customers who want that, as Groupon does provide a valuable service to some customers who want great local deals, as ShoeDazzle does provide a valuable service to some customers who want a new pair of cheap shoes KK endorses every month. So some of these startups do have nice niches.
But the value of these startups just isn’t as great as they’re expected to be. When you raise $30M on $150M, you’re expected to be worth $500M in 1-2 years, so (depending on your growth) you better be generating $100M+ in revenue by then. That’s asking a lot of niche businesses.
Second, it’s silly for me to hate. It’s a lot easier for me to wax about the reason for failure in retrospect, and to be honest, I was advocating investments in these companies 2 years ago. It’s just interesting to observe the unfolding of an era of business model innovation.