Data-Labor-Technology

E-commerce is only expected to make up a greater percentage of total retail sales in the U.S. in the coming years, a trend that has been accelerated by the coronavirus. That means there’s a lucrative opportunity ahead for e-commerce platforms like Shopify and BigCommerce. But among Shopify’s competitors — which includes a bevy of tech companies like Magento, WooCommerce, Salesforce, Microsoft and Amazon — no one company yet has emerged as the biggest threat to Shopify’s position as the go-to e-commerce platform for DTC brands.

A March report from eMarketer projected that DTC brands would account $17.75 billion, or 2.6% of total U.S. e-commerce sales in 2019. But, e-commerce platforms are eager to court direct-to-consumer brands, because it’s a segment that is growing more quickly than total U.S. e-commerce sales, even though the rate of growth is slowing, according to eMarketer. In 2018, sales from DTC brands grew 56.5% from the year prior, and 33.1% in 2019.

Agencies say that Shopify’s dominance comes down to a few factors. One, it’s one of the easiest platforms to get started on, because it requires less customization. Second, as Shopify’s customer base and revenue has grown more quickly compared to competitors, that’s allowed it to justify investments in more costly services for its customers, like a fulfillment service that Shopify unveiled last year.

But Shopify’s dominance also says a lot about the state of DTC startups. The reason why so many DTC brands still use Shopify is because they haven’t grown to the point where they require a more unique e-commerce setup. Many of them still only sell at most dozens of product SKUS. Most of them still only sell primarily through their website and a handful of stores. Some don’t sell wholesale through other retailers, and they haven’t developed their own marketplaces. And, despite earlier DTC startups’ efforts to brand themselves as tech companies, ultimately tech isn’t that much of a differentiating factor for DTC startups.

“I think Shopify has a lot of the mindshare,” said Mark William Lewis, founder and chief technology officer at the e-commerce agency Netalico. “Part of that is because of the stock price — people just think of Shopify and think ‘oh that’s an e-commerce name that I know.’” Lewis said that the majority of his clients do use Shopify, primarily because it is the easiest platform to get started on. But, there are a few limitations to Shopify, namely that it doesn’t allow for as much customization in the checkout process for the regular, paid tier. (Shopify’s enterprise product, Shopify Plus does offer more customization at checkout, he said). For example, one of Netalico’s clients, which sells pet medications, needs to collect more detailed information at checkout, like a veterinarian’s name and contact info. That client operates off of Magento, which Lewis said allows for more customization at checkout.

In its S-1, BigCommerce said that the growth of DTC brands, was a trend that would work in its favor, and that it believes its platform can grow with these startups as they mature. “The growth in [DTCs] has corresponded with demand for turnkey e-commerce platforms that support both rapid product launch and scaling to mid-market size and beyond,” the S-1 stated. However, until BigCommerce has more of these DTC clients that can grow to mid-market size — and proves it can support them — Shopify will likely remain the dominant platform of choice.

Michael Cassidy, CEO of Shopify agency BVA, said that he thinks Shopify does the best job of growing with direct-to-consumer brands, citing its willingness to invest in its fulfillment network. “Shopify is able to think about drones, they’re able to think about unique things on shipping, they’re able to think about AI/virtual try on,” said Cassidy, whose agency works with about 75 DTC brands at any given time, including Chubbies and Untuckit. “I think a lot of that is really exciting for merchants.”

When a brand might have to start to consider a Shopify alternative, said Cassidy, is “when you start getting into a more complex business.” And ultimately, many of today’s DTC startups haven’t gotten there yet.

“If you have a 10,000 SKU catalog, if you have mix of DTC and B-to-B, if you have multi-channel marketing, like an Avon that has a bunch of sales reps, if you have a huge international business — those are some of the things that might get you thinking, alright well is Shopify for me, and do I need something else,” said Cassidy.

“After all the tech companies moved in, our rent skyrocketed,” said Doane, adding that paying the exorbitant rent for the office space didn’t seem to make sense just over a month after renting it. “[Kelly and I] looked at each other and were like, ‘Why are we beholden to having these four walls and putting people inside them?’ I’ve worked from kitchen tables and built things successfully.” 

The rent hike changed course for Doane and Gibbons and they pivoted from building an agency in an office space to doing so remotely. It not only changed where they were working but who they hired (the first full-time employee hired was based out of New York City rather than Los Angeles), how they worked with clients (they have clients based all over the world including WeTransfer, the United Nations and Water Equity) and when they worked (employees work on their own schedules but have meetings mid-day when it works best across time zones). 

As agencies across the globe continue retool their in-person processes for long-term remote work due to the on-going coronavirus, already remote agencies like Main and Rose have been examples of how separated workforces are possible, even in creative fields. Per Doane, agency leaders have even reached out to the shop to understand how to master remote working. 

“It’s funny, now we’re helping other agencies figure out all the little tricks we’ve learned over the years,” said Doane. “For example, you have to be excited when you come on camera before a client and you have to look nice. Coordination is a big part of being remote. When you’re with a client, who is actually presenting? Who jumps in where? Having all of that figured out before you’re on a call with a client is key.” 

Over the years, the shop has grown to have 12 full-time employees across the globe based not only in Los Angeles and New York, but Denver, Jeddah, Saudi Arabi and soon Charlotte, N.C.. (That said, a small portion of its workforce had been furloughed recently due to coronavirus but the shop is working to add those employees back into the fold now.) Even interns have been based abroad as last semester the agency had an intern based in Scotland. 

“We can work all over the place,” said Doane. “We’ve been able to figure out a way to work globally exceptionally well. People work on their own time. When we need to find time to collaborate it’s almost easier to hop on a Zoom or Google Hangout. It’s a much easier way to expand across the globe quickly.” 

Creative brainstorms comes via Zoom or Google Hangouts and instead of putting ideas of a white board, they use Google Docs to share notes and keep track of ideas. To stay connected in real time employees will either communicate via Slack or go old school and hop on a call. 

That’s not to say the agency never gathers employees together. Before the pandemic, Main and Rose employees would get together in person a few times a year to do yoga or go on hikes together. Doing so helped foster a deeper interpersonal relationship between employees, according to Courtney Cannon-Booth, digital director at Main & Rose. 

“Getting to know each other better on a personal level really helps us work together well via Zoom or Google Hangouts,” said Cannon-Booth, adding that while the shop only gathers employees together a few times a year it’s a positive way to “refresh” for the team. 

Of course, working remotely isn’t entirely seamless. Without being in an office together, it’s harder for Cannon-Booth and Doane to help employees who might be stuck on a particular task or to understand why some deadlines aren’t being met. That said, they believe the agency’s staff is more productive overall because they are remote. Without the distractions typical of an office — like a coworker stopping by for a quick chat or a noisy neighbor — Main and Rose employees are able more easily focus on the tasks at hand. 

Being fully remote also means that employees don’t have to limit travel to vacation times. “From a creative’s perspective, we need different experiences, to go to different places, to see different landscapes to really be inspired,” said Cannon-Booth.

“If you’re not inspired at home you can go to Greece, Italy or wherever it is you want to go. You can go do that. I do work in different locations across the country quite frequently.”  

Over the last year, The Times has built 45 new proprietary first-party audience segments for clients to target ads. Those segments are broken up into 6 categories: age, income, business, demographics and interest. By the end of the year, it will introduce 30 more segments. At the beginning of July, it started running campaigns using these segments. A team of a dozen people is working on the project, although more are involved.

Sasha Heroy, senior director, ad products and platforms, joined Digiday Publishing Summit Europe Live to discuss the steps and progress in the publisher’s first-party data strategy. The below has been edited and condensed. 

What prompted the announcement in May?

We’ve been talking about our data offering for some years and been developing a suite of products for the last two years that have been very well adopted today. For the last 12 months, the focus has been on our first-party data audience strategy and reducing reliance on third-party data, that’s been a major focus of quite a few teams at The Times.  

What would be the impact if you turned off third-party data for targeting tomorrow?

We certainly do use a good portion of third-party data in our direct targeting ad business today, but we have covered our bases with the first suite of products released at the beginning of this month. We have focussed on segments that advertisers use most heavily and we have covered a good portion of the third-party data usage with first-party data alternatives. 

Of course, there is still the process of educating advertisers on our offering and getting them comfortable with our methodology so I wouldn’t want to turn it off tomorrow but we are in a good position. We’ve had some experience in Europe, where we’re not using third-party data for audience targeting today. We found many customers when made that change overnight, were very open to other targeting products, especially contextual targeting.

How do you build up alternatives using first-party data?

When we started this investigation a year ago into the feasibility of developing a first-party audience business, our first hurdle was proving we could invite readers to share information that would be useful to our advertisers, showing in a transparent way how we would use that data. In the first proof-of-concept, many more readers than anticipated were willing to share information as a truth-set for how we use these audience models. Having 6 million subscribers and many registered users is valuable for a first-party audience business, but an enormous amount of data is used to inform models that are gained from repeat visits and reading habits from registered and anonymous users in the model.

When using survey data, how can you make sure it’s fully representative and not self-selecting?

We have various ways of putting surveys in front of audiences who might be willing to respond. But then we have to validate the data and the output of the models, like different tests against the third-party alternative segments that we are replacing. We’ve done comparisons using different methods to allow us to say, confidently, that our segments are at least as, if not more, performant than third-party alternatives. We have ways of looking retroactively at campaign performance and seeing how segments of the campaign that weren’t targeted to first-party audiences but reached a specific member of the audience, performed against the rest of the campaign.

We’re also working with an external vendor who has a great deal of panel data to verify output as well. We’re still so close to launch and have had a massive amount of data back from the vendor that we are in the process of reviewing right now. So I don’t have any data points to share but we’re very excited about the preliminary results.

How else will you test the effectiveness of that data?

Our methods will evolve over time as will the audience categories that we look to the model. On an ongoing basis, we intend to refresh the data and have set goals to keep testing our models. The plan is to refresh data constantly and solicit at least 10,000 more survey responses each quarter for the foreseeable future to make sure our audience data is up to date and accurate as peoples’ lives change. We have a track of work ongoing right now to determine the best ways of this ‘always on’ data collection to give us that feedback loop.

How are ad buyers responding to this, is this making them spend more with you?

It’s early to say what impact it will have on the second half of the year, but we have received a great deal of excitement from advertisers. The message we hear is, ‘of course we prefer first-party data, so much third-party data is known to be unreliable.’ We’re in the process of letting advertisers know our approach and whether we’ve selected the right set of audience segments and how they can evolve.

Publishers say buyers are further behind in embracing the loss of third-party cookies, how will you bring advertisers up to speed?    

It seems to be the case that Google’s announcement about third-party cookies has really prompted marketers to focus on this. A lot more conversations are happening, the timing feels right for us to be exploring our approach to marketers, some RFPs include questions about first-party data. That’s a very good sign that we’re connecting with them.

How confident are you of meeting advertising forecasts in the second half of the year? 

There’s not much I can share about that apart from that we feel a great deal of confidence in the first-party data program we have put together and the work we are doing to expand that offering and eliminate third-party data in the targeting business.

TV has held onto the upfronts even in the face of the rise of digital channels like search and social that allow advertisers to turn campaigns on and off from one minute to the next. The crisis, however, has pushed TV ad buyers and sellers to make TV advertising more pliable and remake the terms of upfront agreements. The question is whether that will be enough to stave off wholesale change.

“COVID definitely called attention to the lack of flexibility of TV in a way that has always been in the background,” said Stacey Stewart, evp and managing partner of integrated investment at UM Worldwide.

In March, many advertisers asked TV networks to let them out of the commitments they had made last summer. Despite the deadlines for such requests having passed, the networks complied. They opted to sacrifice short-term revenue to preserve long-term relationships. But, in doing so, they opened themselves up to advertiser pressure for lasting pliability, making flexibility the focal point of this year’s upfront negotiations.

“The rules of engagement are changing substantially right now. And I do believe that the level of dollars that our clients will be willing to commit on an upfront basis will certainly hinge upon networks’ ability to become more willing to look at different models,” said Catherine Sullivan, chief investment officer for North America at Omnicom Media Group.

At least one agency is making flexibility a precondition of this year’s upfront negotiations before registering any money with the networks. “If they’re not willing [to agree a client’s flexibility demands], they’re going to be last in line and lose out in this year’s upfront because demand is softer than in years past,” said an executive at this agency.

Options on the table

Advertisers, agencies and TV networks are putting seemingly every option on the table to restructure the staid upfront deal. Considering the current economic uncertainty, advertisers are looking to give themselves more leeway with regard to the money they pledge to spend. Meanwhile, TV networks are trying to determine how to provide that flexibility while ensuring that most of the committed money — 70%, per TV network sales executives — cannot be canceled. 

Historically, advertisers have been able to opt out of portions of their year-long upfront commitments on a quarter-to-quarter basis. The cancelation amounts vary by advertiser and by quarter, but they range from 15% to 50% of the pledged amount. However, advertisers have to give networks an early heads up if they plan to cancel a portion of the next quarter’s commitment. The cancelation window also varies. Most commonly, advertisers have to provide notice 45 to 60 days prior to the start of a quarter, though some advertisers like movie studios have deals that only require 30 days’ notice.

In this year’s upfront negotiations, advertisers and agencies are looking to loosen upfront contracts’ cancelation terms. Most commonly, advertisers and agencies are looking to shorten the quarterly cancelation window to 30 days and increase the cancelation amounts to at least 50% of the committed dollars. But ad buyers’ flexibility demands branch off from there. Some buyers are angling to connect cancelation options to how the crisis affects individual advertisers’ businesses, such as enabling a retail advertiser to immediately cancel its commitments in full if an agreed-upon percentage of its stores are forced to close. Others have asked to be able to cancel two-thirds of the committed dollar amounts or to strike deals on a quarterly rather than annual basis.

“We’ve probably seen two dozen flexibility framework options thrown at us. Half are unreasonable, and half are understandable,” said one TV network ad sales executive.

TV networks’ concerns

As much as TV networks don’t want to deter advertisers from participating in the upfront, they have their own businesses to protect. Networks rely on upfront commitments to guarantee revenue against their programming costs, especially expensive content like original shows and sports rights. 

“Original shows are a huge undertaking with hundreds of people on set and millions of dollars spent. That takes planning, and the upfront conversations we’re having help us forecast and project and budget. It’s different than digital content environments that are real-time with low production,” said a second TV network ad sales executive.

Besides, TV networks already offer advertisers greater flexibility than what is ironed out in upfront agreements. According to TV network executives, advertisers regularly ask for two-week extensions when making cancelation decisions ahead of a quarter, and at least half the time, the networks grant these extensions. That cuts the cancelation window to roughly 30 days for advertisers on 45-day terms and would cut the 30-day cancelation window that ad buyers are after to around 15 days, which would be cutting the window too close for networks. In light of the extensions, “anyone seriously entertaining 30 [days for cancelation windows] is nuts,” said the second network executive, noting that the movie marketers already on 30-day windows rarely ask for extensions.

Nonetheless, TV networks are willing to play ball — to a point. “There has to be a trade-off. If you want greater flexibility, you need to give something back,” said a third TV network sales executive,

Among the trade-offs being proposed by networks are to shorten cancelation windows in exchange for keeping existing cancelation amounts or to increase cancelation amounts but also ad prices. Additionally, TV network groups that own multiple linear channels as well as streaming properties are offering to work with advertisers to move money around, redirecting a campaign from one channel to another in accordance with audience shifts or subbing in different brands that an advertiser may own in the case of companies like Procter & Gamble and PepsiCo.

TV networks are wary of bending too much to advertisers’ flexibility demands, however.   While they were willing to do so in the spring, they are seeing that begin to bite them in the upfront. 

In the early phase of this year’s upfront conversations, networks and agency holding companies concentrated the flexibility discussions on the advertisers in categories like travel and quick-service restaurants that were most in need of that flexibility. “Three weeks ago, we were having thoughtful conversations [with the agency holding companies],” said the second TV network sales executive. “Three weeks later, they’re taking that openness and saying they want it for everybody. So the negotiation begins.”