Podcast Summary
Innovative business model of Italic: A subscription marketplace for consumer goods: Italic empowers manufacturers to sell directly to consumers through a subscription marketplace, providing them with infrastructure and enabling lower prices and higher margins for all parties involved.
Learning from this episode of Founders Field Guide is the innovative business model of Italic, a subscription marketplace for consumer goods that works directly with manufacturers. The company offers a membership that provides access to over a thousand products, designed and developed by Italic, at significantly lower prices than traditional incumbents. However, the more intriguing aspect of Italic's business is its heavily managed marketplace model on the supply side. Italic aims to empower manufacturers to become merchants of their own by providing them with the infrastructure, often not buying inventory from them directly. This approach allows manufacturers to sell their products at lower prices and retain higher margins, ultimately benefiting both consumers and manufacturers. This model challenges the traditional supply chain dynamics and offers an opportunity for manufacturers to have more control over their sales and pricing.
Italic's business model: Global market access and higher yields: Italic's business model provides manufacturers access to a global market and higher yields on existing production capacity through its payment orchestration, operational network, distribution, and technology tools. Membership increases purchasing velocity and maintains average order value.
Italic's business model offers manufacturers access to a global market and higher yields on their existing production capacity through its payment orchestration, operational network, distribution, and technology tools. The analogy to Costco breaks down in that Italic's business requires aggressive online education to consumers due to its lack of physical presence, whereas Costco relies on word-of-mouth and store recognition. The membership component of Italic's business was a "noble experiment" and was found to increase purchasing velocity and maintain average order value despite price drops. The business aims to differentiate itself from traditional direct-to-consumer brands and focuses on technology and operations rather than just marketing and profit markups.
Disrupting the traditional manufacturing model: Italic's membership model transformed the focus from retail to technology and operations, enabling manufacturers to sell directly to consumers and own the inventory upside.
The shift to a membership model in business transformed the focus from retail to technology and operations, creating a virtuous cycle of attracting more customers, securing better volume discounts from manufacturers, and expanding product offerings. The manufacturing world plays a crucial role in this process, with manufacturers acting as key customers and stakeholders. A century ago, the manufacturing process involved the brand purchasing a product from a manufacturer, who required upfront cash flow for production. The brand would then distribute the product to retailers, each adding their own margin. The value of a product could increase significantly from the manufacturer's cost to the end consumer. In the world of manufacturing, whoever owns the inventory owns the upside, and manufacturers historically lacked a distribution channel. Understanding this dynamic was a key insight that led to the creation of a business like italic, which aimed to disrupt this traditional model by bringing manufacturers and consumers directly together.
Brands, Manufacturers, Retailers, and Consumers: Navigating the Complex Relationships: Brands aim for low inventory costs, manufacturers face thin margins, consumers shop online for convenience but prices are comparable, and all parties adapt to the evolving retail landscape.
The relationship between brands, manufacturers, retailers, and consumers has evolved significantly over the years, with each party facing unique pressures and challenges. Brands aim to buy inventory at low costs and sell to consumers at higher prices, putting pressure on manufacturers to reduce costs. Manufacturers, in turn, face pressure from clients, including large retailers like Costco and Sam's Club, to accept razor-thin margins. Consumers, who historically shopped from retailers rather than brands, have seen the rise of online commerce, which initially promised lower prices by cutting out the middleman but has since seen prices become comparable to in-store shopping. The original appeal of online brands like Bonobos and Everlane, which focused on cutting out the middleman, has evolved as well, with consumers now recognizing that the prices they pay are not significantly different from what they would pay in a store. Despite these challenges, the potential benefits of online commerce, such as faster delivery and access to a wider range of products, remain compelling.
Direct-to-consumer evolution: From value to brand image: Brands prioritize story and image over value, while manufacturers focus on getting clients with razor-thin margins. The Chinese market's customer-to-manufacturer approach inspires innovation, but finding legitimate manufacturers online remains a challenge.
The direct-to-consumer business model, which was once thought to offer significant savings to consumers by cutting out intermediaries like retailers, has evolved. Brands now focus on making money through markups and consumers are increasingly buying based on brand image and story rather than just value. Manufacturers, meanwhile, aim to get more clients while making razor-thin margins. The Chinese market, particularly Pinduoduo, offers inspiration with its customer-to-manufacturer approach, where established manufacturers are brought online. However, manufacturing remains an offline business, and finding legitimate manufacturers online remains a challenge. The consumer's rational reason for buying is value, which is the quality they get for the price they pay. Manufacturers, on the other hand, are optimizing for getting more clients while making the same margins, regardless of the buyer. The success of the direct-to-consumer model now depends on the brand's ability to offer a compelling story and image, and manufacturers' willingness to digitize their businesses.
Consignment manufacturing and inventory ownership trend in Asia e-commerce: Manufacturers in Asia e-commerce can increase profit margins by producing for e-commerce companies, but face challenges in financing inventory and designing products. Companies like Italic are building infrastructure to help with digital catalogs, inventory optimization, and fast logistics.
In the e-commerce landscape, particularly in Asia, there's a trend called consignment manufacturing and inventory ownership where manufacturers produce products for e-commerce companies, which then pay for and own the inventory. This model allows manufacturers to increase their profit margins significantly, as they no longer bear the inventory risk. However, there are challenges for manufacturers in this model, particularly in financing the inventory and designing the products. In the west, where logistics rely heavily on overseas manufacturing and long lead times, it's difficult to replicate this model. But companies like Italic are working to build the necessary infrastructure to make cross-border commerce more efficient and satisfy consumer demand for new products as quickly as possible. This includes technology and operations to help manufacturers digitize their product catalogs and optimize inventory levels, as well as fast and affordable logistics to get products into the hands of customers as quickly as possible.
Manufacturers contributing to fashion design: Manufacturers are evolving from traditional production to design collaboration with brands, providing unique designs and lower costs through consumer insights and optimized production lines.
The role of manufacturers in the fashion industry is shifting from traditional production to a more consumer-centric approach, where they not only produce but also contribute to the design process. This is made possible by manufacturers housing more R&D and having a deeper understanding of consumer trends through feedback from multiple clients. This shift allows manufacturers to optimize production lines and capacity, while also offering brands the appeal of unique designs and lower costs when selling directly to consumers. However, it's crucial for manufacturers to get sophisticated around consumer insights and become a centralized source of truth for upcoming trends. Brands, on the other hand, need to deliver consistent experiences and sets of products to their customers, making the manufacturer's role in design an essential aspect of the product process. This new model not only benefits consumers with unique designs and lower prices but also allows manufacturers to maximize their production lines and capacity, ultimately leading to increased efficiency and profitability.
Brands curate and develop existing products: Manufacturers source products, brands add value through curation and development, consumers make value-driven decisions, and technology enables cross-border commerce innovation
The role of brands in consumer markets has evolved, with consumers increasingly making purchasing decisions based on a mix of emotional and rational considerations. On the manufacturing side, brands often don't create products from scratch but rather curate and develop existing ones. For instance, many high-end cookware brands source their products from a limited number of manufacturers in China, assembling handles, pots, and surfaces to create their branded offerings. Consumers, in turn, are more educated and discerning in their purchases, leading to a rise in value-driven decisions and private label brands. Brands, however, remain powerful due to their emotional appeal and status symbol value for some consumers. The infrastructure and technology to facilitate cross-border commerce are still developing, making it an exciting area for innovation. When it comes to building a business, the first step is to empower manufacturers to become merchants by establishing a supply chain, using the brand to build a membership, and creating a marketplace to offer business services.
Building infrastructure for Italian brands in Asian marketplaces: To succeed in the Asian market, Italian brands need to address operational and logistical hurdles, including lack of technology solutions, long production times, and complex payment systems. Building foundational infrastructure is crucial to enable manufacturers to onboard and begin sales process.
The cross-border marketplace business model, particularly for Italian brands, is still in its infancy and faces significant infrastructure challenges in the technology, operational, and financial sectors. Western analogies like Shopify, Amazon, or Costco may not be directly applicable due to the unique requirements of this business model in the Asian market. The lack of technology solutions for marketplaces, long production and fulfillment times, and complex payment and financial transaction systems are major operational and logistical hurdles. Building foundational infrastructure from scratch is essential to enable manufacturers to onboard as merchants and begin the production and sales process. The ultimate goal is to create the next generation "everything store," but the path to getting there involves tackling these infrastructure challenges head-on.
Direct sales from manufacturers for unbeatable prices: Intellic offers high-quality products at unbeatable prices by cutting out the middleman and selling directly from manufacturers.
Intellic's unique value proposition lies in offering high-quality products directly from manufacturers at unbeatable price points, unlike traditional marketplaces where customers pay merchants' markups. The founders' personal excitement and the business' potential for large outcomes are essential for building a successful company. Operating as a distributed company has provided valuable insights from different markets, and creating a new category requires thinking from first principles and taking unconventional approaches, such as reducing margins and leveraging existing tools instead of building from scratch.
Exploring Opportunities in Marketplaces, Infrastructural, and API Businesses: Companies managing marketplaces, infrastructural businesses, and API businesses offer unique advantages. Marketplaces like Pilot and FlexBurn provide scale and improved customer experiences. Infrastructural businesses, such as ShipBob and ShipMonk, centralize services in the supply chain. API businesses have endless applications for second-level providers.
Managing marketplaces, infrastructural businesses, and API businesses present exciting opportunities for modern business models. The speaker admires companies like Pilot and FlexBurn, which manage marketplaces for service providers, offering scale advantages and better customer experiences. Infrastructural businesses, such as ShipBob and ShipMonk, focus on centralizing services in the supply chain, and there's potential for further innovation in this area. Lastly, API businesses continue to be promising, with endless applications for second-level providers that offer essential functions for software businesses. From a personal experience, the speaker shares NotPOT, an American wellness company they started with their girlfriend. They contrast NotPOT with a classic venture-backed business, highlighting the ease of building a brand, buying a product, and selling it with a markup. Despite the differences, they emphasize the importance of shared knowledge, such as the significance of payments, in both types of businesses.
Thinking outside the box for CBD e-commerce payments: Understand consumer behavior, adapt to trends, and find efficient payment processors to build a successful CBD e-commerce business.
Building an efficient e-commerce business, even in a niche market like CBD, requires thinking outside the box when it comes to payment processors and understanding consumer behavior. The larger players may not accept CBD payments, but there are excellent alternatives with competitive rates. Consumers are not swayed by small price differences, and it takes a significant price reduction to encourage switching from established brands. Pricing is a crucial yet often overlooked factor in consumer brands. Additionally, trends in consumer behavior and marketing strategies can shift rapidly, so it's essential to adapt and innovate from the beginning if you aim to offer multiple product categories.
Testing market and verticalization for everything stores: Founders of everything stores should quickly test the market and become verticalized to better understand consumer behavior and maximize potential.
For startups, especially those aiming to be everything stores, it's crucial to test the market and become verticalized as quickly as possible. Vitalik, the founder of Italic, emphasized the importance of this approach after learning that consumer intentions don't always align with actual purchases. Being a founder's partner and having supportive parents were the kindest things that Vitalik mentioned in his life. The former provided unwavering support during challenging startup experiences, while the latter inspired him with the technical progress and opportunities he witnessed while growing up in a country undergoing significant change.
