Beyond the Cart: Post-Purchase Thesis

Welcome back to Beyond the Cart for Episode 2! In case you missed Episode 1, we covered an overview of the commerce enablement landscape and how we see its future. In this episode, we will explore the post-purchase landscape and our expectations for value accrual in specific product verticals.

Why Post-Purchase?

The tools for creating a brand are more accessible and user-friendly than ever. Although building a brand has never been easier, the bar for scaling it has also increased tremendously with the new wave of online-only, direct-to-consumer (DTC) merchants. E-commerce-native brands are not constrained to the same operational complexity as their brick-and-mortar counterparts, and this comes with a whole new set of challenges.

We have been closely following the trend of rising costs in customer acquisition channels brought about by the cookie collapse. Increased user privacy means fewer monetization opportunities for Big Tech, and the knock-on effect is higher advertising costs for merchants. The days of cheap social media customer acquisition channels appear to be a thing of the past, and e-commerce-native brands need to find new ways to unlock incremental value from existing customer relationships to sustain their margins. We refer to this as lifetime value (LTV) tooling. 

Now, more than ever, brands need to own their customer relationships. Historically, e-commerce-native brands have obsessed over customer acquisition costs (CAC) and haven’t conceptualized a robust customer LTV strategy. The obvious way to increase LTV is by creating lifelong customers through high quality products and a brand image that resonates with consumers – Patagonia is a great example of this, but, as you may have guessed, not every brand can be a Patagonia.

What we have come to realize is there are subtle frictions in the digital customer journey that can be optimized as LTV plays for merchants. Our post-purchase thesis revolves around the strategies brands can use to increase customer LTV – leveraging software in returns & reverse logistics and reviews & user-generated content (UGC), achieving stronger purchase conversion, building a loyal customer base, and increasing retention.


LTV Tooling Landscape

Returns & Reverse Logistics

One of the biggest anxieties with online shopping is not knowing if you’ll like what you bought and what to do with it afterwards if you don’t want it. Many companies have unclear and arduous return policies and processes, adding friction to the purchase experience. A negative experience is often caused by complex in-house solutions that typically leverage rudimentary “early 2000s” customer support ticketing software to send customers shipping labels.

We believe that returns management software (RMS) presents an opportunity to improve customer experiences and reduce customer support costs. RMS is the software layer interfacing customers and merchants, handling logistical and financial workflows on the back-end. Customers can initiate the returns process through a portal on the website, which is processed in a vacuum for the UI, flowing into reverse logistics on the merchant’s end. The reverse logistics platform then connects the RMS to the merchant’s logistics operations – in-house or to a 3PL provider – to track the returned merchandise until it is back in inventory.

Quick caveat: I recognize this is a very simplified view of reverse logistics, as there is a complex value chain involving several handoffs before an item is returned into inventory. Reverse logistics also doesn’t work universally across retail; there is yet to be a solution at the enterprise-level for high volumes and non-standard product sizes (picture the nightmare of returning and swapping out IKEA orders at scale without going to return items in-store). There is whitespace in the logistics flow to solve for the dirty areas of fulfillment and logistics.

We are focused on the high ROI for RMS that is more achievable for SMB/midmarket retailers with standard package sizes. Investing in returns and reverse logistics can help streamline supply chain costs and cut down on administration costs as well. However, the ROI for a business doesn’t stop there – there are a few LTV plays to be considered here:

  • Retaining Revenue From Returns: Many RMS platforms have slick, checkout-like returns interfaces that present the opportunity for an exchange rather than a return. Loop Returns has an excellent illustration of the step-by-step customer journey. Loop has found that brands retain revenue on up to 50% of their returns by offering exchanges.
  • Brand Affiliation Creates Repeat Purchases: Providing a pleasant returns experience will build a stronger relationship between brands and consumers, which can lead to repeat purchases in the future.
  • Reduced Post-Purchase Anxiety: If the consumer knows they can easily return/exchange a purchase, they are more likely to follow through, thereby increasing conversion. Though the argument can be made for consumers buying variations of a product with the intent of returning most of them, the purchase that sticks will only be through an online retailer that offers frictionless returns in the first place.

A stat that jumped out at me: 50% of consumers review a return policy prior to making a purchase, and 18% abandon checkout because the return policy is unsatisfactory.

Reviews & User Generated Content (UGC)

Another area we feel there is massive disruption potential is product reviews. We have all looked at several nearly identical products on Amazon, and my bet is the deciding factor was the number of product reviews.

Some of the largest review applications encourage manipulation and fake reviews, creating mistrust between consumers and merchants. This occurs at scale, with examples at Amazon and large review aggregators, such as Yelp, becoming involved in paid review scandals. 

In a world where brands are increasingly positioning themselves as emotional and desired commerce purchases, the reputation management of products and services is mission critical. The big picture idea is that in competitive industries with little differentiation (eg. CPG, apparel), the reputation of your offerings as a merchant increases in importance and can be achieved with UGC in reviews.

UGC provides additional product information and serves as social proof that increases conversion. The presence of photos and videos in reviews causes conversion to skyrocket.

Aside from conversion uplifts at checkout, there are ancillary benefits to reviews with UGC:

  • Brand Trust & Loyalty: A satisfied consumer who trusts the online shopping process is more likely to return for future purchases.
  • Cheap, Authentic Marketing Content: An unintended consequence of generative AI will be consumer distrust of what they see online. UGC can be leveraged to crowdsource photo and video content for marketing campaigns to create an authentic look and feel for reviews. 
  • Product Development Insights: Reviews can offer actionable product insights, which can be leveraged to fine-tune product design. At scale, merchants can use natural language processing (NLP) to analyze customer sentiment and evaluate their products.
  • Customer Support Cost Reduction: By level setting expectations with customers pre-purchase, there is a lower likelihood of customer support incidents post-purchase. Furthermore, the costs of the returns process can be reduced as customers are more likely to hold onto what they buy.

Value Accrual and LTV Tool Consolidation

From Inovia’s perspective, the value will continue to accrue at the application layer for LTV tools. There is a lot of room for disruption in returns & reverse logistics, and reviews & UGC. That said, it may be difficult to achieve unicorn status as a company that only focuses on a single product as a standalone unless there is significant consolidation in the space. We believe there here will be the opportunity for a private-equity-style roll up of players with similar product offerings. The result will be a winner-take-all category killer emerging in each product vertical as the best-of-breed app. An alternative consolidation route is a platform approach, where companies acquire players with adjacent functionality to complement their core product. Yotpo is a great example of what this will look like – they acquired SMS Bump (SMS marketing) and Swell (loyalty & rewards) to round out their platform offering.


Food for Thought on our Post-Purchase Thesis

If there is one key takeaway, it’s that there are non-obvious ways to increase customer LTV, build brand loyalty, and increase conversion by improving the post-purchase experience in e-commerce. There is a premium on capital efficient growth in the current market climate, and prioritizing customer retention/loyalty should be atop every merchant’s strategic agenda. Below is a summary of our post-purchase thesis:

  • Customer Retention > Acquisition: Utilizing returns and reviews to create loyal customers is a way to minimize CAC and drastically increase LTV, thereby improving unit economics and capital efficiency (read more about retention vs. acquisition marketing here).
  • Returns as a Revenue Driver: RMS apps can be utilized as conversion boosters and revenue retention mechanisms.Though it seems counterintuitive, offering a frictionless returns experience can be the deciding factor for customers on the fence about a purchase.
    • Conversion Lift: Offering seamless returns can reduce purchase anxiety and encourage customers to follow through and buy. 
    • Revenue Retention: Should  customers want to return an item, RMS portals can offer to exchange as an option and retain that revenue.
    • Additional Post-Purchase Touchpoint: When customers return to a merchant’s site to make a return/exchange, there is an opportunity for them to make another purchase. 
  • Reviews & UGC Are Becoming Table Stakes: There are several new entrants in the reviews space with seemingly limited product differentiation. We believe the key to winning the space will be intuitive products with seamless integration into the e-commerce stack to reduce barriers to adoption.

Thank you for tuning in to episode two of Beyond the Cart! Please see our website to read more about our commerce portfolio companies and more thoughts on the topics.