How Digital Is Destroying the Mechanics of High-Margin Products
In less than a generation, the Internet has become so fundamental to our lives that the President recently petitioned the FCC to regulate it as a utility — a must-have, like water and electricity. Amazing companies have flourished on the back of that utility, many of which have transformed the ways we buy products and services.
I believe the Internet is now positioned to transform another category of offline commerce: companies that have been selling over-priced physical products whose absurdly high margins have been hidden from consumers by complicated purchase processes that look a lot like services. I call this category service-product commerce or “SPcommerce.” It’s big. It’s ripe to transform. And it’s good for consumers.
This is natural progression given the history of companies that have grown up the web:
The first phase of Internet companies, such as AOL and Google, helped consumers get online and get acquainted with the Internet’s basic functions. The next phase of Internet companies, such as Facebook and Amazon, allowed people to do things on the Internet (like network with their friends or buy products). And the most recent phase of Internet companies, such as Uber and AirBnB, allow people to access services off the Internet but in a better way (like hail a cab or find a room for the night).
A few years ago, I predicted this Internet-driven transformation of services businesses and the progress since then has exceeded even my expectations. In that time, for example, Uber has achieved a valuation greater than at least 72 percent of the companies in the Fortune 500 while AirBnB has taken notable share from traditional hotels. And the heavyweight champion of ecommerce, Amazon, just announced its online services marketplace. So, now, you can buy plumbing services and do your Christmas shopping at the same time on the same site.
I believe SPcommerce is the next phase of this online commerce revolution.
Eyeglasses are an example. A simple pair of prescription glasses typically costs hundreds of dollars, although the actual cost of goods is a tiny fraction of that. The complicated process of purchasing glasses — filling your prescription, going to a store, fitting a frame, having lenses made, and dealing with insurance — confuses the product (glasses) with the service (making, fitting, and paying for them), resulting in unnecessarily high prices that cost consumers up to $30,000 each over their lifetimes. One company, Warby Parker, has pioneered the use of the Internet to take the complication out of the process, delivering custom prescription glasses to consumers for $95, simplifying the service and making the product value clear. As Warby’s co-founder, David Gilboa, told the Washington Post earlier this year, “What we saw was an industry based essentially on 800-year-old technology that was characterized by high prices, high margins, mediocre service and low levels of innovation.” This is precisely the kind of industry that the Internet is now well positioned to disrupt.
Another example is custom art and photo framing. Today, if you buy cool, inexpensive art on Etsy, you may be getting a great deal on a handmade original but when it shows up at home, you will be challenged to get a good deal on the frame. The custom framing market is terribly inefficient and expensive, typically charging hundreds of dollars for a simple frame, requiring multiple visits to a framing store, and confusing consumers with too many choices and costly upsells such as special glass, archival matting, and the like. Framebridge, a company providing custom picture frames online, sells handmade frames at fixed, reasonable prices, with museum-quality materials, and beautiful, simple choices. What has traditionally cost hundreds of dollars and taken weeks, Framebridge can now deliver for about $100 and a few clicks online. Like Warby, Framebridge uses the Internet and the post office to make purchasing cheaper, faster, more convenient, and less confusing. Many of us have closets full of unframed art because we can’t bring ourselves to endure the cost and hassle of having it all framed. If recent Internet history is any indicator, that art collection may soon end up on your walls. My venture capital firm, Revolution Ventures, liked the idea so much that we invested in Framebridge and we are actively prospecting for other promising SPcommece opportunities.
While intuition might tell you that taking face-to-face interaction out of the process and moving it online would make the buying experience less customer-friendly, the opposite is often true. The best online companies are using technology to delight customers by taking headaches and burdens out of the process while making the experience more personal and customer-centric. And these online brands make themselves openly accountable for great customer service by connecting to people and communities all over the world who share their experiences through social media.
Companies like Casper are doing the same thing with the confusing and expensive mattress market and I expect that many other industries that are presently confusing and absurdly expensive to consumers will get simpler, cheaper, and more customer-friendly, too. Transformation in industries like financial services and car buying are coming.
Tige Savage co-founded Revolution with Steve Case and Donn Davis. He is managing partner of Revolution Ventures, a venture capital firm based in Washington, D.C. that focuses on early stage investments in companies that are transforming large, existing categories. Examples include LivingSocial, Zipcar, Booker, and Revolution Money, where Tige has been an investor and board member.