What is vertically integrated ecommerce and when is it appropriate?

Andy Dunn, the founder of Bonobos and one of the most thoughtful writers I know on ecommerce, penned a good piece yesterday entitled Digitally Native Vertical Brands. He was talking about what most of us describe as vertically integrated ecommerce, and gave the following definition:

  1. The primary means of interacting, transacting, and story-telling to consumers is via the web.
  2. It’s a brand, and that brand is vertical. The name of the brand is on both the physical product and on the website.
  3. The DNVB [vertically integrated ecommerce company] is usually maniacally focused on customer experience and on customer intimacy. The experience tends to be three-part bundle of physical product, web/mobile experience, and customer service that collectively become the brand in the consumer’s imagination.

He had a fourth point which added that there’s usually an offline extension to the brand. I agree that’s usually true, but isn’t a necessary condition.

He went on to say that vertically integrated ecommerce makes sense:

where there is some differentiation in the core physical product made possible by the DNVB nature of the model (and this is the key thing entrepreneurs get wrong in starting DNVBs the world doesn’t need)

For me this is key. If the product is the same as available via other channels then the only basis for differentiation is distribution and that’s unlikely to be enough for a startup to achieve success. Personalisation is a common way for vertically integrated ecommerce companies to differentiate their physical product (e.g. our partner company Lost My Name) and carrying a wider range of SKUs than will work in physical retail is another (e.g. our partner company Spoke).

The alternative model of multi-brand ecommerce makes sense when products are commoditised (e.g. Amazon) or when selection and choice are problematic (e.g. our partner companies Thread and Live Better With).

Andy says we are “in the first decade of a multi-century trend” towards vertically integrated ecommerce. I think we he’s right in that we will see more and more of it as new technologies open up new possibilities for customisation. Lost My Name, for example, because possible in 2013 after HP released a printer that could cheaply print high quality bound books with a production run of one. However, there’s an implication in Andy’s post that multi-brand ecommerce is on the way out. I’m not sure that’s true. Over the last three years Forward Partners has invested in both types of ecommerce business and I don’t expect that to change in the next three years.