In this class, we discuss Vipshop and JD. And how a smaller ecommerce site can compete with larger players, especially in the area of logistics.
The exercise for this class is:
Which of these three options make sense for Vipshop in logistics?
1) Copy JD: Build an in-house logistics and delivery network.
2) Copy Alibaba: Work with multiple partners (in logistics and/or ecommerce).
3) Outsource logistics: Find a partner or contractor for this. Just be an ecommerce site.
Now, make a decision: What would you recommend to the CEO?
- Write 3 paragraphs with your answer. Do it on your smartphone. Or a PC. Or a piece of paper (take a picture and save it).
- Think about versioning and competitive advantage.
Articles cited in this class:
- #4: The basics of VIPShop and JD – and more digital economics
Concepts for this class:
- Digital and Information Economics
- Competitive Advantage
- Digital-Physical Hybrids
Companies for this class:
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.
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Welcome, welcome everybody. My name is Jeffrey Towson, I teach at Peking University and this is Jeff’s Asia Tech class. Now in today’s class we’re gonna answer or focus on the question of, should VIP Shop build out their logistics like JD.com did? Now we’ll talk a bit about VIP Shop, it’s one of the smaller e-commerce players of China, although it’s quite large, it’s just smaller than the giants you usually hear about. And this question of, you know, do they have to build out this massive logistics networks like the major players have done, which was, is a really difficult question for the CEO and management to answer. So we’re going to talk a little bit about some frameworks for taking that apart. We’re going to talk more about what I call the dangerous, but sexy economics of digital, which is something that was in the previous episode. And then we’ll talk a little bit about pipes versus platforms in these e-commerce sites and how it’s actually kind of a mix. It’s actually kind of a sliding scale. It’s not one or the other. It can be one or the other, but it often is not. So that will be the topic for today. And the question I’m going to put to you, your challenge, is what would you do if you were advising the management of VIP Shop about this question? Should they build out their own logistics network themselves or should they find another way to sort of solve that problem? But first, if you haven’t subscribed, please do so. You can go to jefftowson.com and there’s a 30 day free membership. So, you know, it doesn’t cost anything. And as part of that, you get the lectures, you get the weekly articles, and we’re doing daily updates, at least two per week now. So lots more content. It’s all sort of focused on the same topic, the same questions. Okay, so let’s talk about VIP Shop. Now, this company is really pretty cool. It’s pretty cool. lot of interesting questions around this one. And I just finished teaching a course at Bay Dara, I’m sorry, SEABS, China Europe International Business School. And one of the papers that the students put together was about what VIP shop should do about its logistics unit. I thought it was just like a great question. It was really good paper and just a fantastic question. So a lot of the info I’m gonna cite to you is from that. So I should give credit here. little hello to Sunny, Vivian, Wei Ren. Thank you so much for such a good question. Really compelling, interesting to think about. All right, so VIP Shop, not as well known. It is, you know, it was one of the earlier players founded 2008, Eric Shen, Arthur Hone. And, you know, it was kind of a niche play. And this is a really important point, which is. How do you compete with the giants, the Alibabas and the Jingdongs in this? Well, you know, e-commerce in China and I would say Asia broadly has not been win or take all. We see players enter on a fairly regular basis. We don’t see one company dominating like say WeChat. It’s actually somewhat dynamic where you do see players jump in regularly, not regularly, but every now and then. And VIP Shop was one of them. They came up with a clever niche play. and they jumped in there and they took some market share. And that would see sort of the phase one question, how do you break into the market? Then phase two is more, how do you win over the long term, which is actually kind of, in many cases, a harder question. So, you know, VIP Shop launches 2008. They grow pretty rapidly. They’re profitable. I’ll talk about their strategy in a sec. March 2012, they go public in New York. And so you can see their financials very, very interesting. And they also had particularly good timing because the sort of the e-commerce boom of China was like 2011 to 2017, 2018. And they absolutely caught that wave. Timing is a big deal. So their revenue growth and their sort of purchase growths has been pretty spectacular. Let me cite some numbers for you here. Basically going up from about 10 billion renminbi in 2013 to 84 billion renminbi in 2018. So that, I mean, that’s awesome. Like it’s hard to do better than that in life. Okay, now their approach was really, I think two clever ideas. Number one was flash sales, where they don’t sell everything. Actually they sell a fairly limited set of products and it’s mostly in apparel and it’s mostly for women. And every day they have a flash sale or several items so every day you get an email or you can go to the site which is on your phone of course and you can see what the flash sale is today and you can buy certain select items at a really good discount. And these are brand name items. These are not just random Jeff started a shoe company and here’s Jeff shoes and they’re cheap because you can buy cheap stuff anywhere in China. That’s not the point. These are branded items that are selling at a particularly attractive price. And every day an email or note goes out about here’s the flash sale for today. The clock is ticking. You only have a certain number of time that you can buy these before the sale ends, hence flash sale. That’s very clever. Because when you compare that with like a Jingdong or an Alibaba or these others where they’re offering everything. Well, it’s very hard to compete with someone who’s offering everything. It’s got a fairly compelling consumer hook that there’s urgency to it. There’s a sense of exclusivity. Exclusivity is a very good thing to play on in China in particular. And it’s also kind of fun. You know, it becomes a habit every day. You check what’s the flash sale today. It’s it’s you know, it’s not just the branded item and it’s good price. It’s fun. So the consumer proposition is fairly compelling. Now you could question whether that proposition is a business in itself or maybe it’s just a feature. Like, couldn’t Alibaba or Jingdong offer this as a feature? We have Alibaba, we have Jingdong, we offer everything. Oh, and by the way, we have a flash sale every day at 2 p.m. I mean, that’s kind of an important question. Okay, the other clever thing they did was… on the supplier side, they go to the brands and they basically buy their inventory from them. So any sort of merchant, brand, retailer, usually they’re talking directly to the brands, I believe. And they say, what’s your sort of overstock? What’s the stuff you’re trying to get rid of? Give it to us in one shot and we will move all of it for you in one day and you can get rid of it. but you’re also not flooding the market with cheap stuff all the time, which would impact your core business. If you’re, let’s say Christian Dior, I don’t really know apparel brands very well, but let’s say you’ve got a reasonable apparel brand, like a Gap or a Zara or something like that. You don’t want discount stuff showing up on the web all the time, but if there’s a way to move it all within one or two days, or a big chunk of it, then that’s not a bad solution. So they’re on one side, they’re offering this cool thing to consumers on the other. They’re going to good brands and getting sort of these batches of supply, which they then move out and the brands are comfortable that they’re going to be treated well, the items are actually going to move and they can get rid of it comfortably and it’s not going to show up in funny places. They don’t want to show up. So to it, two sort of clever ideas there that pair quite nicely. Okay, so that gets us to 2012, 2013. They’re catching the wave of e-commerce of China. They’re growing quite rapidly. Their customers get up to about 32 million monthly customers as of last year. So I mean, they are dramatically smaller than the Alibaba’s and the Jingdong’s where you’re talking about 500 monthly effort users or Jingdong or Pinduoduo where, you know, you’re in the hundreds of millions. We’re not at that level. We’re at the, you know. Tens of millions, but that’s still great. Okay, now there’s a couple interesting things. I think that have been happening along the way with regard to let’s say competitive pressures and the consumer side the consumer side. You know, the risk is basically what I just said is one of these major sites would just replicate what you’re doing, which I think most of them are pretty much doing but. You know, this site has already been branded for this. They have a customer base that probably checks in every day, every couple of days. So you’ve got some consumer power there. Probably the bigger problem is on the competitor side with regards to gross margins. You know, this idea that other sites are gonna do this. There’s a lot of downward price pressure on selling apparel in China. The market is not like it was in 2012 where it’s just the boom years and everyone’s making big money. It’s slower. competitors are turning their guns on each other more. So margins are gonna start to get compressed. People say they have a competitive advantage. And oftentimes it looks like they do when you look at their sort of return on invested capital and their gross profits. But oftentimes what that’s really about is you’re just in a rapidly growing market. And who has a competitive advantage and who doesn’t, often doesn’t really get played out until the market slows. and tightens and the competitive pressure gets much much worse and then we see who’s really protected and who’s not. So the gross profits on this business are roughly in the historically I think they’ve been in the 29% gross margin level 25% and now they’re dropping down closer to 20 19% okay. Still you don’t get everything in life. Okay with against this you have the question of logistics which I think is the cool cool question here. You know, if you’re going to build out a big logistics infrastructure, there’s a lot of benefits to that. You control the relationship with your customers. One of the reasons Jingdong went into building a huge logistics infrastructure is because they cared very much about quality and the consumer experience. And there’s only a couple touch points that they actually have with the customer. I mean, they have the online interface where you buy. They have customer service if you call in, which is a big problem for them because they’ve got to hire a ton of these people. And they have the delivery person. So they had a lot of complaints on the delivery side and they built out their own infrastructure for that. Okay, so there’s a lot of benefit to that. There’s benefits to becoming more and more efficient, automation, increasing use of digital and logistics, which is a big, big deal in China right now. I’m gonna talk a lot about what’s going on on the logistics side of this. And if you do it yourself and you have a big footprint, it also lets you deliver quite quickly. And Jingdong has really used its logistics platform as a big bat to hit the other players because they do this 11, 11 thing where, you know, you order by in the evening and you get it by 11 the next morning. No, I got that wrong. You order by 11 at night, you get it the next morning. You order by 11 in the morning, you get it that day. I think that’s it. It’s 1111 and that puts a huge pressure on the competitors because customers have begun to expect that. Chinese consumers expect rapid on-demand delivery. It’s just how the market works now. So if you’ve built your own infrastructure, you have a much better ability to do that. And in theory, VIP shop people should be able to do this because they’re not carrying hundreds of thousands of SKUs because of their flash sale approach. They actually have a relatively small number of items. Okay, so those are the pros. The cons are it’s really expensive. I mean, the last class was about the economics of digital and how I said, look, the economics of digital are really great and attractive and sexy if you can get them. You can grow without additional costs. There’s no marginal production costs. Distribution is cheap. You know, it’s a non-rival good. All of those economics that you get by being a digital platform like an Expedia or a Ctrip, you don’t get those if you have to build warehouses all over the place. Suddenly you’re in the physical world in a big way. Those are big upfront costs. You have to run them. You have to hire up tens of thousands of staff. And Jingdong really spent billions and billions of dollars to build out their logistics network. And if you look at their hundred and I think 70,000 employees right now. The vast majority of them are doing logistics and delivery. So it’s very, we like digital, but this is a very physical business. And so if you do that, big upfront costs, capital costs, lots of ongoing capex, because you have to continually upgrade these things, new IT, new IT, new IT, and you lose a lot of the, you sort of lose a lot of those attractive economics by mixing it with sort of real world physical economics. So that’s kind of the trade-off. Okay, now what VIP Shop did was they sort of began building out their own logistics early on. They used third-party couriers early on, which is logical. And by 2014, they had five large logistics and distribution centers. This is from the student paper, so please give credit to them. This is awesome, good job. They built five large logistics and distribution centers. And that covered most of the Chinese cities for them at that time. And then they also sort of expanded that over time. Six, seven, I think they’re at eight logistics, you know, sort of warehouses now. But, you know, this raises the question of, are you going to keep doing this forever? Are you just subscale as an e-commerce site on the logistics side? Like this is the big challenge for the niche e-commerce players is Are you, you can, you can compete on the digital side as a niche player quite well, but are you too small to really compete in this game on the logistics side with these massive companies? You know, is it just ridiculous to try to match their spending and their constant upgrades and their constant investments? You know, is it like, look, I’m just too small for that game. I have to stay a digital player. And that’s a really a difficult question. Now, another sort of thing we have with VIP Shop, is they have a lot of returns. This is, apparel is cool because there’s a lot of things people care about with apparel, fashion, people buy frequently, the new styles change, people buy new clothes. There’s a lot of cool stuff about apparel and fashion. One of the big downsides of apparel and fashion is people do a lot of returns. I like this, it didn’t fit, I changed their mind, they shipped it back. So… You know, these warehouses and logistics, you’re always sort of sending goods back at a fairly high rate. So, you know, VIP shop, they’re, let’s say they got two problems in life. They have increasing competitive pressure hitting their gross margins and they have particularly high logistics and fulfillment costs, you know, up in the eight, nine, 10% range. That’s, you know, that is kind of a big problem for them. And, you know, the way people attack that. If you’re a regular player like Jingdong, the way you attack that percentage of your costs allocated to logistics and fulfillment is you get bigger and bigger, more products, more volume. That drives more volume through your logistics network, which lowers the cost per unit because these are kind of fixed costs. So you’re playing economies of scale game there where you want to push a lot of volume, your unit costs drop. And then you also invest a lot of money. This is CapEx again, into making your logistics more and more efficient. You’re building more IT systems, you’re upgrading, you’re putting in robotics, you’re putting in automation. You know, that’s how you sort of tackle that percentage of your cost structure. Well, again, both of those things are difficult to do if you’re a niche player. You can’t necessarily run high volume through, and it’s hard to spend huge dollars year after year driving, going for efficiencies in your system. So that’s kind of, you know, I think we’re VIP shop sits, which is a really cool question. And so here’s kind of my question for you. And this is the question for the class is, what do they do? And let’s talk about sort of three options. Option number one, okay, we just have to do what Jaden Dong does. We just have to accept that we’re gonna have sort of high logistics costs as a percentage of sales because we’re smaller, we’re a niche player, and that’s just life. And we have to keep flooding money into logistics, year after year to upgrade to upgrade to IT. And that’s gonna hurt our free cash flow, but our profits will be good. And that’s just the game we’re playing. And the alternatives, which I’ll talk about, of using somebody else for that, they create too many problems. in terms of the service that we deliver to our customers, in terms of returns, in terms of being dependent on someone else for a core part of our business. Okay, so do we accept the high costs and just do it as the cost of doing business because the strategic risks on the other side are too much? Let’s call that option one, the Jingdong option. Option two, we’ll call it the Alibaba option. Now Alibaba doesn’t do any of this. Alibaba, you know, as we kind of talked about before, they’re a digital platform. You know, they’re, they’re purely software. They built other vehicles for other stuff like logistics. So they built, you know, Tsai Niao to handle their, their logistics, you know, platform all over China, increasingly all over the world. And within that, they brought together the players of the market. So there’s lots of express delivery companies in China, SF express, STO, ZTO, they’re all, they’ve all had like the same names. They’re all sort of in Zhejiang. It’s kind of a funny story. And within that, bringing all the parties together, what Alibaba really provides in that is data technology and tools. That’s what they do. They’re kind of the data tech backbone that stitches all the other companies together and allows Tsai Niao to sort of work as one. It’s an interesting structure. I’m not gonna go into it too much, but. The idea is, okay, option number two is we do a Alibaba play. We look for other players in the market. We stitch together, let’s say three or four niche e-commerce companies, the same type of structure where we’ve got sort of coordinated activity on the logistics side, and we’re trying to get to some level of scale there. And third option, we could just contract. Okay, you know, maybe we just have to accept it and maybe we partner up with SF Express. Maybe we partner up with ZTO. You know, and we just accept that, look, we are an e-commerce site. We are not a logistics provider. That the logistics business of China is its own animal. You’re gonna have major players in this. A couple of them are gonna be the tech giants like the Alibaba’s, but a lot of them are just gonna be major logistics players in their own right. And that’s not us. So let’s find a partner and we will just use them for this stuff. And we will probably provide the data tech side and they will run all the warehouses and the delivery and all of that. And we just partner up. So we’ll call that option number three. All right, so that’s the question for today. Now, the last class we talked about what I called the sexy but dangerous economics of digital and I kind of gave you half the story actually. I gave you the, wait did I call it the sexy but yeah, I gave you the attractive part. I said, you know, here’s what’s really interesting about the economics of digital and why everyone gets so excited about them. I mentioned a couple of things. I said, actually I mentioned four. I said there’s the zero marginal costs of reproduction or production. You know, writing the first book costs you money. Making the next hundred copies costs you nothing if it’s an ebook. I talked about non-rival goods. The fact that a lot of intangible assets, digital goods, services can be used by multiple people at the same time. That’s pretty important. A lot of these goods are non-consumed. So you know, a lot of people can read the book. They can share it. You know. The economics are a lot better than like growing apples, which is a tough business. You often get very, very cheap distribution. Which, well, I mean, in theory, yes, people I think overstate this. I think there’s actually more distribution costs than people talk about because, oh, in theory, I can just email you the document. I can just, you know, it’s a digital good. I can just send it. Well, it turns out reaching people costs money. Going through Amazon costs you 30% of your price. Going through an app store on Apple costs you a certain percentage of money. You know, there’s actually some costs in there, but. Generally speaking, it’s a lot easier than shipping things around the world in trucks. And those were the four. The fifth one I also mentioned was platform business models that every now and then when you get digital entering a business, you can start to do platform business models. And that’s going to be a big subject for weeks and weeks and weeks. Okay. So all of that is pretty cool. And that’s kind of the attractive side. When you look at the billionaires of the world that are always sort of… in the papers, the Bill Gates, the Mark Zuckerbergs, the Steve Jobs, most of them are building off some degree of digital economics and or platform business models, usually both. However, that’s the good side of the story. Why are they so dangerous? Well, you know, I started out the last lecture by saying, look, why is everything on the internet free? Which is a good thing for consumers. It’s not so good if you’re selling stuff. Can be pretty bad. If you’re a traditional book publisher, that’s not awesome. It’s hard when people, and I sell my little e-books online for four bucks. When I published through a traditional publisher, this was Pearson Financial Times, their retail price was $25. And here’s the messed up part. I make more per book selling at $4 than I did going through a major publisher selling at $25. The dollars to me per book are greater at $4. I make like let’s say $1.50. That’s my coffee fund basically. So From the consumer side, it’s amazing. From the competitor, the company side, this can be incredibly brutal. If you’re a traditional newspaper, everything online is kind of free. Like I read the news for free. I can’t think of the last time I paid for a new subscription. So one, the price is a problem. Two, because you’re just doing it online, anyone can do it. So a lot of products are just commodities. Like, you know, that calculator on your iPhone, that app is free, right? And if that group didn’t make it for free, a thousand other people could write that app in like a, I don’t know how long it takes, like three days and make it free. So lots and lots of things have become basically commodities which can be pretty brutal. So we also tend to see some other weirdo stuff going on. I think about this way, if we’re talking about traditional competition slash strategy thinking, how do you price things? Typically, the answer is you price things at the marginal cost of production. You build the factory, then you make cars, and then you figure out how much it costs you to make this specific car, and then you add a margin to that. Okay. But I just kind of said that goods is zero. So how do you how do you price something if your marginal cost is zero? Well, the answer to that in a lot of cases is you give it away for free. Now, in theory, you also have a initial cost often like look, the second book was free, but the first book cost you money. So things like the Avengers movie costs whatever couple hundred million dollars to make. Yeah, in theory, they could give it away for free. But They have to look at the total production cost and then you do it against that. But that’s what happens in a lot of businesses like movies. In smaller businesses that’s really not what happens. What happens is once you’ve spent the money on the initial one, that sunk cost, it’s gone. So at that point, why not give it away just about for free? Because I’ve already spent that money anyways. I’m not getting it back. So You know tends to be that for a lot of businesses even though in theory the total production cost has a certain number and you should price above that most people often price for free anyways cuz that money’s gone. That’s two factors a third factor to think about is you can get a lot of price wars. If you don’t have competitive barriers if you don’t have a cost structure to limit. What you can know how far people can drop prices. People can behave irrationally didn’t get into price wars you know they can start to drop these things so you can get a whole lot of bad behavior and it’s pretty brutal. It’s it can be very very hard most software is a commodity and most of its free. And being in that business is really hard and when you look at how profits are distributed like for decades like fifty percent of all the profits in the software business was microsoft. Like they took almost like half of it or something like that. And everyone else was making stuff and barely getting by. I mean, it’s a really hard business. Uh, unless you have a competitive barrier. So people who are in software, especially if you’re doing digital platforms, yes, you have digital economics. That’s great, but you gotta have a network effect. You gotta have a, uh, switching costs. You’ve gotta have something. You do not want to be in a digital business without a competitive barrier. It’s. absolutely brutal. Okay, so that’s kind of takeaway number one is don’t play in this world without a competitive barrier. It’s really bad. Okay, let’s say you have some degree of barrier. All right, how do you price? I mean, how do you do it? Like, you can’t take the marginal cost and add a little 10% or 5%. Okay. The answer to that question, the stock answer is, you have to focus on the perceived value to the customer. You don’t charge based on what it costs, you charge based on the perceived, how much it’s worth to the person buying it, basically. And what’s your alternative? I mean, really, what else can you do? Can you price based on cost? No, we just said you don’t wanna do that. Can you price based on competition? Again, you really don’t want to do that. You got a price based on the perceived value to the customer. Now that’s interesting because that’s not totally obvious what that is. And the perceived value can vary significantly person to person. I’ve let’s say I’m selling an ebook, my, my one hour China book. Okay. The marginal cost is zero. What is the perceived value of that book? to an executive who’s getting on the plane to go to China for a meeting. And I’ve literally had this call, like on a, fairly regularly, people like send me pictures or send me notes, like I’m on a plane from Chicago to Shanghai. The guy next to me in first class is reading your book. Like it’s kind of the book like a busy executive buys on the way for their first or second trip to do a China meeting. Now, what is the perceived value to that person who spent, you know, $9,000 on a business class ticket, I could probably charge pretty good for that. let’s say 25, $30. I could probably do that. Okay, what about an MBA student? You know, I get college professors call every now and then they say, we’re gonna use your book. Can we buy, you know, 100, 200 copies? And I say, sure, of course. What I would notice that they say, can you give us a discount? And I’m like, dude, it’s $4. Like how much of a discount do you want on a $4 book? You know, it’s ridiculous. It’s just the process for how colleges buy. It’s not a personal thing, but it does make me kind of laugh. Anyways, you want to price as much as you can person by person by person because perceived value varies. It varies by person, by customer. It varies by moment in time. If they need it today versus if they need it some other time, are they urgent? You know, so this brings up kind of the big concept for today. which we call versioning. This is on the list. This should be in your toolkit. Every class I try and give you a little more information about a company and I talk about a couple concepts. So every day in theory, your knowledge of companies and your toolkit gets bigger. Okay, versioning is a pretty good tool in the toolkit, which is you create different versions of your products and you put them at different price points. So you vary features. You try and maximize the pricing for each type of version against the perceived value of that version. Now, ideally, if you do that, the customers will then segment themselves. Because truth is, I don’t know who’s buying this book online. There’s no way for me to really know that the person buying this one is the senior vice president getting on the plane versus the college student in Ohio. So what I can do is I can create different versions and the customers will self segment against those. And you’ve seen this before, hardcover books versus paperback books, that’s versioning. Going to the movie theater, the weekend, the Avengers comes out versus waiting a couple weeks and getting a home rental or waiting until it’s on Netflix and watching it for free. So you see versioning all over the place. And it turns out you can do a lot of this in software. Turns out software is pretty easy. I mean, if you’re gonna make a different physical book, it’s actually kind of a pain to make 10 of them. But you can do this online pretty easily. You just give people four options and they click on the one they want. So, you know, what features might you vary? Delay, do you want it now versus can you wait two weeks to see this movie? Can you wait a month to see this movie? New releases, versions that have the most current information. Here’s a Bloomberg terminal. You can get up-to-date market information today versus free stuff you can get last week’s information. News companies can do this. Here’s breaking news today, this week, versus the New York Times isn’t gonna charge you a lot to read their stuff from a month ago, stuff like that. So delay is one feature you can very convenience. You can sort of, let’s say, restrict the location or the time or the amount of the amount of time a customer can access it like hey you can use our Terminal with this information Monday through Friday nine to five, but you can’t use it 24-seven You can only use it at certain terminals you cannot use it anywhere on your phone you can watch this movie unlimited movies on any device you have Versus only some of our movies on one to two devices per account Things like that. Comprehensiveness, all of the content versus some of the content. If you want the back issues of the New York Times from like 20 years ago, I think you have to pay extra for that. Historical information. Do you want all the geographies or just your geography? You wanna find real estate pricing in just your city or nationally? The depth of detail you’re offered. Let’s see another factor, manipulation. Can you store the information? Can you download it? Can you copy? Can you print it? Can you put it into your spreadsheet? Community. Oh, we have a forum. You know, I’m doing this on my subscription site here that we have a discussion forum. It’s not up and running yet, but that will be for members only. So we’ll have lots of discussions in there, just the people who are on board, but the podcast, the lectures, will probably keep up on iTunes. Annoyance. You can turn off the advertisements. This is YouTube, I think YouTube Red, right? Like if you want to watch YouTube without ads, you sign up for the service and the ads go away. Speed, the software runs faster. If you pay more, people who buy like Adobe Illustrator and professional software tools, they want ones that are faster and can handle more data because they’re doing professional projects. Data processing. Features like that, tax software, you might get certain features for processing and not others. The user interface, serious power users get these, like Bloomberg terminals are an example of this. The people who pay that, which is a lot of money, it’s like a couple thousand dollars a month, I believe. They get these robust terminals that can do everything. And simpler college students, MBA students get on Bloomberg and it’s kind of free or it’s a pretty limited account. One you see all the time is image resolution. If you want to buy photos at iStockPhoto or things like this, you pay more for higher quality images versus lower quality images. So the images you use on a YouTube blog or vlog or on a blog where it’s just a photo, you can use fairly low quality images. But if you’re gonna use it for a print magazine, you want high quality. And then last one is support desk. You know, we have customer service agents on call 24 seven for people who sign up for the premium account stuff like that. Okay, so versioning lets you sort of price yourself more appropriately. You can do lots of versions. Kind of the funny thing about when you offer people lots of like versions, like I never knew if this was true or not, but I’ve always been told that like the most profitable wine on the wine list at a restaurant is always the second cheapest one. because people don’t choose the extremes generally. They don’t choose the cheapest, they don’t choose the most expensive, but they choose the second cheapest. So I always heard that had the biggest market, but I’ve never been sure if that’s true or not. So if you give people three or four options, if you give people three options, they’re gonna choose the middle one every time. You wanna offer at least four or five, and then they’ll probably avoid the extremes. Helps you differentiate. One sort of caveat to all this, if you’re going for network effects, where you’re trying to get people on your platform, then you don’t want a lot of versions. You want a more standardized version because the idea is the more people using this one type of service, the more valuable it is to everyone else using that particular service. So you don’t wanna sort of split your users against those. Okay, so that’s kind of the idea for today. I think there’s a couple other ideas we’re gonna talk about. We’re going to talk about bundling. We’re going to talk about the consumer surplus and we’re going to talk about compliments. Those are all pretty important aspects of digital information economics, but we’re not going to get into that today because I’ve been talking at you for 15 minutes here and I think that is sufficient for that. Okay, so now we get back to VIP shop. What is VIP shop? Is this a version, is this versioning of an e-commerce site from the consumer’s perspective? They’re adding certain attributes and features and they’re really playing those up. And therefore, in theory, they should be self, you know, the audience, the customers should be self segmenting and you’re pulling just the ones you want and you can maximize your pricing against those. Okay, so that’s what it kind of looks like to me. I said earlier, it was like maybe it was a True, it’s a package of features that give you a version of an e-commerce product. That’s kinda how I view that one. Okay, so here’s my question. Within logistics, so I’ve given you sort of two ideas to think about against VIP Shop. I’ve given you this idea of that look, if you’re gonna be a digital player, like an e-commerce retailer and that there are retailers are not a digital platform there retail that they buy goods they sell goods but they’re mostly digital. You have to have a competitive advantage because if you don’t have a competitive barrier the economics even though attractive are very dangerous. And to you’ve got to find some way to price against this no cost structure type of business that makes sense and i think versioning is a good way to think about that she got versioning in terms of pricing. and you got this idea of having a competitive advantage. Okay, so what should they do on their logistics? Does having a logistics network build out a competitive barrier? Well, I just kind of said, you know, one of the cons of this is it costs a lot of money that you have to spend a lot of capex that you have to continually update that you want to get economies of scale on the supply side. Well, those are types of competitive barriers. You know, the stuff that’s hard for you to do is also hard for other people to do. So that’s always the trade off. Like, you know, you want to do stuff others can’t do, but not so hard that it’s impossible. So is that a comp- does getting into logistics in a major way themselves create a competitive barrier, let’s say in capital spending or in terms of economies of scale on the supply side? Is there any sort of impact if we do versioning on this? Because of the way that we’ve chosen to sell this product. It’s a flash sale. It’s just today. We’re gonna have to move a whole lot of merchandise from one or two merchants through our warehouses in 24 hours. Let’s say we’ll stock it a couple days ahead of time. We sell it all, and then we have a whole new sort of supply coming in from a different merchant a couple days later. Does the versioning have an impact on what kind of logistics you need? Does that make it easier or harder if we’re gonna do it in-house? If we’re gonna be a data platform for lots of players or if we’re gonna partner with someone else? That was option one, two, and three, the JD, the Alibaba, and the partner options. Does that have an impact there, the versioning of what we’re doing? Okay, so here is your assignment, here is your homework. I am going to do this as a writing one. I’m gonna try and give you these. these exercises and more and more stuff that you can just do by tapping on your smartphone. But this one’s not, I think, doable for that. So I’m going to ask you to sort of type something for this one. I’ll try not to do that too often. But I want to know, like, okay, the CEO of VIP Shop calls you in, says, what should we do? What’s your three-minute pitch? Three minutes, that’s about three paragraphs. What’s your pitch for what they should do about their logistics problem? Should they A, do the Jingdong method that we’re going to build this in-house B, do the Alibaba thing. We’re going to put together other players and be their sort of data backbone, but not do it ourselves. Or three, we are going to partner with someone and just not be in the logistics business ourselves. We’re going to be a e-commerce site. So with those three options, give a recommendation and try and argue that in terms of versioning and competitive barriers as concepts that matter in this question. Okay, now, please do it. I promise you, even if you just stop whatever you’re doing, hop off the treadmill. If you have to, type on your phone with your thumbs, pull out a piece of paper, use your PC. Even if you just spend 10 minutes doing this, it’s gonna make a huge difference in terms of what you remember six months from now. You know, this will go from being an idea to something that you start to feel comfortable with. Active learning is so much more powerful than passive. Okay, so do that now, take 10 minutes, pause this, and then please come back. Oh, and those three options are in the show notes for this. So you can look in there if you don’t remember them. So how did you do? Make some progress, struggle with it a little bit. I mean, generally, like you wanna keep yourself at like a six or seven level of frustration. Like if you’re at six or seven in terms of your frustration level, it means you’re struggling to understand something new and maybe difficult, that’s good. Like that’s where you wanna be. If you’re at like a three. you’re not pushing yourself hard enough. You’re like a nine, okay, you probably get so annoyed that it’s not good. I try and keep myself at like a six or seven in terms of struggle and frustration. So anyways, all right, so it’s an interesting question. I’ve actually been thinking about this for the last couple of days. And there’s another idea in here which to me is critical, which is this idea of sort of, we call digital physical hybrids. You know, something we see in China, which we don’t see in Silicon Valley very much, is this willingness to get your hands dirty in the physical world. Like Facebook doesn’t have, everyone’s in a nice clean campus with beanbag chairs and staring at computer screens, so is Google. Chinese entrepreneurs are really willing to get out there and put people on the ground and build stuff. and get into, I mean by get your hands dirty, it’s get into the physical world which doesn’t have these nice, attractive economics. So a company like Meituan just hires millions of these riders around on scooters. And a company like JD will build its own robots and build its own factories. And we really do see that in China where we don’t see it as much in Silicon Valley. And I kind of like that. And… What you get as a result is you get these digital physical hybrids where it’s mostly a digital business, but it’s got a strong physical component. We’re combining the bits and bytes with atoms and physical things, and therefore the economics are a mix as well. So Meituan is a online marketplace, a digital platform between mostly restaurants initially and consumers. But they also have this huge army of people on the street delivering stuff. Jingdong is kind of the same way. Mobike is a physical product. So the thing about the digital physical hybrids is you pay for it in your economics. Your economics aren’t as amazing, and particularly the amount of money it costs for growth is a lot more, because if you’re gonna double your volume, you have to buy a bunch of stuff. You gotta buy a bunch more bikes. Purely digital platform just grows without any costs, more or less. So you cost you a lot in terms of scalability and some of the economics, but here’s the but, but it is a great defensive barrier because the other thing we see in China, one of the reasons I think Chinese companies are so willing to do this is the purely online world is so ferociously competitive. If you’re just a pure site like we’re a marketplace or an e-commerce site. or a video sharing site, there are so many competitors and it’s so ruthless that you almost want to get into these capital intensive aspects just to get some degree of protection. And that’s what logistics does. I mean, it’s a supply side game where you have to spend a lot of money in capex to build these warehouses. If you’re bigger than the other partner, you get some economies of scale, which means your per unit costs are greater because it’s kind of a fixed cost. So if I have If we both spend 10 million on warehouses, but my volume is twice yours, my per unit cost is gonna be less. And then there’s not just the initial CapEx, but there’s ongoing yearly CapEx for maintenance and upgrading. So that’s sort of this yearly game. And that gives you a good degree of protection. It turns out competing with Jingdong is incredibly hard. because you have to replicate their entire national logistics structure because they can promise 11-11 delivery anywhere in the country. And if you wanna promise the same, you have to replicate that massive expenditure on logistics. So, you know, these digital physical hybrids really have some great physical, or have some competitive protection. So for me, that’s kind of… The thing that jumps out at me about this case is, yes, they’re an e-commerce site and they have a nice niche position, but they’re not terribly well protected. They’re not protected against the major players like the Jingdongs and the Alibabas and the Pinduoduo who could offer flash sales as a feature. And they’re also not that protected against startups. either e-commerce startups or other companies, maybe a 10 cent or whatever, that are gonna jump into your space horizontally. They’re just not that protected as a purely digital company. So it’s their logistics side that I think is actually harder to replicate. So if I were them, I’d be thinking three things. I’d be thinking, we are a smaller e-commerce player without any great barriers on the digital consumer side. on the demand side. Our greatest source of protection is going to be on the supply side. So we need to build all of this ourselves or at least most of the core pieces and then we can partner for some of the other ones. And not only do we need to build it ourselves, we need to specialize it. We don’t want to have logistics that’s just a smaller version of Jingdol. We want to have logistics that is optimized and specialized for flash sales. that one of these major players would have a hard time matching what we do because their logistics network is not set up to do this. I’d want specialized CAPEX and logistics on that side. That would be kind of move number one. I’d be going to the supply side for protection, long-term. And the second thing I’d be doing is, okay, within that, let’s try and get a bit bigger by expanding from apparel to some other consumer product lines. Let’s still be the flash sale group, but let’s offer something in flash sale that is hard to replicate because of one, you can’t match our logistics thing because it costs money. And two, our logistics are specialized for this, so ours are a little bit better. I try and expand that story by adding apparel to, you know, let’s say three or four other product categories, but with the same basic pitch. That would be my second thing. thinking a lot about how do we stay sort of the greatest consumer experience in terms of flash sales. Because this is a moving target. What was cool in flash sales four years ago is not going to be cool today. And you have to continually keep upgrading your consumer experience, which may expand from the idea of just flash sales to more of these other factors I talked about, excitement, fun. having a daily habit where you get a special brand or a special experience. Maybe we put some, we do a little more physical aspects where we’re doing experiential retail, where we’ve got pop-up stores around town that show up at noon every day and you can come in and get our flash sale. I’d be, I’d be trying to enhance that experience all the time so that even if the JDs or whatever decide to jump into this, um, which I’m pretty sure they’re doing, we’re always just better. so that our 30 or 40 or million core customers always stay with us because they love this stuff and we’re the best at this. So that would be kind of my three things like keep the logistics in-house because that’s my best source of protection, especially if that is specialized infrastructure for my type of niche play. Two, I’d be trying to expand the product carriers and just get bigger. And then three, I’d be aggressively upgrading the consumer experience because that really does evolve pretty quickly in China. Anyways, and that would be kind of my take on this. So that’s the case for today. I hope that was helpful. I think it’s pretty interesting question, this sort of smaller e-commerce. I mean, it’s fun to talk about the giants because they’re pretty crazy. But you know, it’s these smaller niche plays that I think have the cool business questions around them. So I’ve been watching this company for a long time. Let me ask you a quick favor. I’m about seven episodes into this and I’ve started reaching out to people in the last week who’ve signed up and sort of said, look, this was the first version of this, but it’s time to improve it. So what needs to be fixed? What’s bad? What is the good part of this that we should do more of? That sort of thing. So if you could take a minute, go to the bottom of… the episode on my website, jeffthousand.com. Each of these podcasts has an episode to it. It’s also on iTunes. But there’s a comment section down below. Or just send me an email, jeffreetousand.gmail.com. And anything you can tell me would really be helpful. It’s so funny, because in class, you get really good feedback when you’re in a lecture hall. You can see when students are kind of falling asleep or not getting it. It’s much, much harder here without that. So, I would appreciate any feedback and I’m going to probably reach out to people more and more and say, look, you know, what do you think? What do you think? What do you think? One of the beauties of doing this sort of digital good is you can iterate over and over and over and keep improving and keep improving over time, which is great. So I’m going to try and do that. Anyways, anything you can tell me would be great. What do you like most? What do you hate most? If nothing else, that’ll get rid of you. That’ll tell me the extremes. What else? Anyways, I’m in Bangkok for a week now, which is crazy for me. Like I’m so on the road in my life that like being in a one place for one week, it’s kind of, it’s unnerving me to be here so much, but it’s, uh, it’s been setting up my apartment here and I’m looking for a contractor to build a studio, which is, uh, like I don’t speak Thai and they don’t speak English, like very rare. And my communication ability in this country is like close to zero. It’s really pathetic. So trying to explain, I would like to build a studio. It’s like that conversation just goes nowhere. Like I can’t even, I mean, it’s ridiculous, but everyone else is getting a laugh out of it. So that’s, I guess I’m good for entertainment, I guess. Yeah. So that’s a, that’s just sort of life and I’m heading out to. China in a couple days and I’m actually I’m gonna visit Huawei, Jingdong and Tencent I believe or WeChat in the next couple weeks all three of them that’s great because I really I really love doing company visits like that I sort of I copy Warren Buffett all the time as I’ve said I’m like a total fan boy which is silly I know but on top of that it’s actually very logical. because you can learn so much about business and life really that I just find it a great way to learn. Anyway, so one of the things I kind of asked him about when we were having lunch one time was, where do you get your information about companies? And he pretty much said, two places, reads annual reports, and then he talks to management. And that’s his two go-to things. And… because it gets you primary data, right? It’s not someone’s opinion, it’s not been processed, it’s, well, it has been processed, but it’s as direct data as you can get. Is here’s the filings with the government, therefore they have to be accurate or close to it, or it’s actually a crime. Or talk to the senior management directly. You know, that’s two sources of direct information, and that’s probably the best you can get, unless you work there. Or you can also talk to employees, you can talk to customers. You know who are really good is ex-employees. Like ex-employees tell you everything. So anyways, I’m pretty excited about going to those three companies and sort of digging into what they’re doing. And that’ll get me to the end of the year. So it’s gonna be exciting. Anyways, that’s it for this class. Thank you so much for listening. Thanks to my subscribers. If you haven’t subscribed, I’m gonna keep nagging. The funny thing is nagging, it’s like totally acceptable as a teacher. Like nagging in general is not awesome to do in life. There’s a couple people that can actually nag, like professors can nag, and like your personal trainer can nag, and it’s kind of a good thing. So I’m gonna nag a little bit. If you haven’t subscribed, please do so. Go to jeffthousen.com. There’s a free 30 day trial. And please subscribe at iTunes. We’re in the early stages of this, but I’ve got a good two years of course, well, I’ve got this course mapped out for the two years. in some level of detail and I’ve got it really mapped out for about six months. So this is going to be a fairly big project and this is just the early days. So you know I appreciate those of you who have sort of taken a chance early on and signed up. I really do appreciate that. Anyways, that’s it from me. Have a great week and I will talk to you next week.