Episode 244
February 25, 2022

Redefining Arbitrage

Arbitrage, arbitrage, all things arbitrage. From Phillip’s redefinition of the word, to being stuck in the eCommerce industry diet fad phase. PLUS: how gentle parenting relates to eCommerce, and the ideas coming from Future Commerce Salons. Listen now!

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this episode sponsored by

What Even is Arbitrage?

  • Phillip’s new definition of arbitrage: an untapped source of potential; a source of growth that's under leveraged or as yet undiscovered.
  • “The real arbitrage opportunity is hard work. Everybody wants a shortcut, and everybody wants the one weird trick.” - Philllip
  • We’re stuck in a e-commerce industry diet fad phase. Everyone is searching for the one weird trick, but there is no weird trick, its just an endurance race of hard work. 
  • “Work hard and keep working longer than you ought, because most others will not.” - Phillip
  • Gentle parenting is a style of parenting that is becoming very popular but there is a common refrain which is to do dangerous things carefully. Doing things carefully can be looked at the same in commerce, we take risks and are not promised a guaranteed outcome, but you test it and learn from it.
  • Luxury by nature is an exception because it will always be the minority. In eCommerce, we often look at luxury as an exception, and we go and build for that experience, but we’re actually building for the exception.

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Have any questions or comments about the show? Let us know on Futurecommerce.com, or reach out to us on Twitter, Facebook, Instagram, or LinkedIn. We love hearing from our listeners!

Phillip: [00:00:22] Hello [00:01:20] and welcome to Future Commerce, the podcast about the next generation of commerce. I'm Phillip.

Brian: [00:01:29] And I'm Brian, and we've got a fun show ahead.

Phillip: [00:01:31] It's Arbitrage Day here.

Brian: [00:01:35] Really? Is that what... We're going to do the whole podcast on arbitrage?

Phillip: [00:01:39] No, we're not.

Brian: [00:01:39] Ok [00:01:40]. Thank goodness.

Phillip: [00:01:41] For the first time in a long time, we're going to cover a fair bit of news here.

Brian: [00:01:48] Wait, wait, wait, hold on. If I say arbitrage 50 times, do I own the term?

Phillip: [00:01:55] That's funny. If you pay attention to Twitter, that's funny in a very specific way. Actually, [00:02:00] no, so we just brought this up in The Senses, which is our twice-weekly email that we send out to subscribers of Future Commerce, and I just wrote a short reaction to a conversation that's going around these days, which is, I think a lot of people are using the word arbitrage, but they don't [00:02:20] actually know what it means.

Brian: [00:02:21] I feel like Nate kind of said that first.

Phillip: [00:02:24] Nate, Nate Palin.

Brian: [00:02:26] Yes.

Phillip: [00:02:29] Who I've never heard pronounce his own last name. So let's just go with that being the pronunciation.

Brian: [00:02:34] Could be "Pal in."

Phillip: [00:02:36] Could be. Could be "Pa lun." {attempt at a French pronunciation} Could be {laughter} the [00:02:40] pseudo-French.

Brian: [00:02:41] Sorry, Nate.

Phillip: [00:02:43] The French, the one of the very terrible French pronunciation of it. Nate, formerly of Michael Kors, Bonobos, and Outdoor Voices and prolifically sort of direct to consumer direct to consumer [00:03:00] grumpy on Twitter. He's actually digitally native on Twitter. And actually prolific.

Brian: [00:03:06] He's not that grumpy.

Phillip: [00:03:07] He's a little grumpy.

Brian: [00:03:07] Occasionally.

Phillip: [00:03:09] Occasionally grumpy.

Brian: [00:03:10] Occasionally grumpy is a better description.

Phillip: [00:03:11] He's old guard, direct to consumer and has...

Brian: [00:03:15] I feel like he'd take offense at that. Maybe.

Phillip: [00:03:18] You think so?

Brian: [00:03:18] I don't know.

Phillip: [00:03:18] I don't think he would. I don't know. Anyway, [00:03:20] this has become a very insufferable beginning of a podcast. He had made a tweet, which was sort of like a mega-thread roll-up of everyone he follows who has ever used the word arbitrage. And arbitrage, for those uninitiated, is a fancy word for really just finding the unfair advantage [00:03:40] in a channel to help your business grow. That's effectively one way to describe it.

Brian: [00:03:47] {laughter} I only laugh because we literally just talked about this.

Phillip: [00:03:50] We literally just had this conversation. And Brian, I feel like it's not that you didn't know what it was. It's that it's been used in so many different ways now, [00:04:00] with most recently in regards to Facebook ads are no longer the arbitrage opportunity that they used to be.

Brian: [00:04:10] Right.

Phillip: [00:04:11] That's usually how it's used.

Brian: [00:04:12] That's right.

Phillip: [00:04:13] Most recently, how it's used.

Brian: [00:04:14] Which is even a debate apparently.

Phillip: [00:04:15] I don't think it's up for debate.

Brian: [00:04:18] Ok, you're right.

Phillip: [00:04:19] If you're asking [00:04:20] me, I feel like it doesn't work the way it used to.

Brian: [00:04:21] It doesn't work the way it used to. All it means is that Facebook ads aren't as effective as they used to be. That's what that means, effectively, right now.

Phillip: [00:04:28] So I had written this piece for The Senses, which...

Brian: [00:04:35] Which, by the way, if you're not subscribed to Future Commerce Insiders, you won't get The Senses.

Phillip: [00:04:39] You [00:04:40] won't get The Senses, but you should be, and you can get that at FutureCommerce.fm/Subscribe, but that's a whole other thing. Oh, by the way, we have a banging subscribe page coming, which has then prompted us to redesign our homepage. So I'm very excited about that because we're growing up. But I rewrote the definition [00:05:00] of arbitrage. So my new definition of arbitrage, so the classical definition as I defined it as "an untapped source of potential."

Brian: [00:05:09] Right.

Phillip: [00:05:09]  [00:05:09]"A source of growth that's under-leveraged or as yet undiscovered," [00:05:14] which is what people...

Brian: [00:05:14] If I was to use it in a sentence, I might say that Roblox is an arbitrage opportunity. [00:05:20]

Phillip: [00:05:20] I have literally no idea what that means. How is Roblox an arbitrage...? That's your new channel for growth?

Brian: [00:05:24] That was in The Senses, too. The other thing that we talked about in The Senses is how Roblox advertisers are having to be really careful on Roblox. It's like a big opportunity, but there are some things to navigate.

Phillip: [00:05:38] Yes. Yes, yes, yes. Yes. [00:05:40] So some companies in particular, because traditional CPG brands advertising have to steer clear of...

Brian: [00:05:50] Minors.

Phillip: [00:05:51] Right. You can't market to children in a very specific way, especially on a children-centric platform like a gaming platform. Ok. We'll get there. We'll get there. [00:06:01] I've [00:06:00] redefined arbitrage because really the thing people mean when they say "arbitrage" is free money for less work [00:06:14] than...

Brian: [00:06:15] Right, it used to be you could dump money into Facebook ads, and you were just guaranteed to make money. [00:06:20]

Phillip: [00:06:20] And before that, you could dump, back in in the 2007 or 2008 days, you could dump money into Google ads, the text ads, the old ones on Google search, right? You could dump money into that and get five to one six to one seven to one. Those days are gone.

Brian: [00:06:34] Talking about this, even in 2017, you could dump money into Facebook, and it would just [00:06:40] be like printing...

Phillip: [00:06:40] Money machine goes {mechanical noise}, right?

Brian: [00:06:44] Yeah, exactly.

Phillip: [00:06:44] That's the whole thing. Money printer just goes.

Brian: [00:06:46] Yeah.

Phillip: [00:06:50] I feel like I want to... I'm going to let everybody in on the secret. This is the secret. I will tell you what the next channel for arbitrage is.

Brian: [00:06:58] All of a sudden, Future Commerce [00:07:00] becomes tips and tricks.

Phillip: [00:07:03] {laughter} That is decidedly what I don't want us to be.

Brian: [00:07:05] No, this is the prediction.

Phillip: [00:07:07] I think the real arbitrage opportunity is hard freaking work.

Brian: [00:07:12] Yeah, I agree with that. It's not the next arbitrage opportunity. This has always been...

Phillip: [00:07:16] This has always been the opportunity. [00:07:20] The fact is, and I don't love who said this, but the person who said it, who made me take notice, was Gary Vaynerchuk.

Brian: [00:07:30] Oh sheesh.

Phillip: [00:07:32] Asheesh [00:07:33]. Gary Vaynerchuk had said some time ago, "I don't have any secrets. I'll tell you everything I've [00:07:40] ever done because 99 percent of people are too lazy to ever do it." And I think something about that really resonated with me. The real arbitrage opportunity is hard work. Everybody wants a shortcut. Everybody wants the one weird trick. We are stuck in the e-commerce industry in [00:08:00] the like diet fad phase of our maturity, and everybody wants the one weird trick and everybody is ready to listen to everybody's one weird trick. But in reality, the one weird trick is there is no weird trick. It's hard work all the way down. And if you're willing to put in hard work. Hold on, let me say it exactly [00:08:20] how I wrote it, because I liked it. I liked the way that I wrote it. Work hard and keep working longer than you ought, because most others will not. And if you can do that... It's an endurance race. [00:08:33]

Brian: [00:08:33] Yeah, totally agree. This does not even come close [00:08:40] to what you've accomplished in running, but last year was a big year for me. I ran my first three half marathons and my first marathon.

Phillip: [00:08:48] I was there for one of those attempts and efforts.

Brian: [00:08:52] No, no, no. Aside from that, no, I mean, I ran three official half marathons, not to mention a bunch of unofficial, yes [00:09:00], actual races. And my first official race marathon. And I summited Helens and I summited Adams, both for the first time. It was a big, big year...

Phillip: [00:09:08] These are mountains in Washington.

Brian: [00:09:11] Yes. Correct. Yes. If you don't know what Mount St. Helens is, it's a volcano that exploded. Also, you probably [00:09:20] weren't born in the eighties.

Phillip: [00:09:22] Probably, probably not. But hey, listen, you pushed yourself and you put in hard work to accomplish what seemed like maybe a really outrageous goal at the time.

Brian: [00:09:39] Yeah, [00:09:40] oh, absolutely it was, and last year was the big year, but that was really just like the result of a couple of years of really hard work.

Phillip: [00:09:49] It's all the result of hard work.

Brian: [00:09:53] Right.

Phillip: [00:09:53] But let's zoom out just a hair because somebody out there is listening to this and they're going to say to themselves, "This [00:10:00] is not the same thing because you have agency and control over you and what you do with your body. I don't have agency or control over what hundreds of people in my company do." It's like the actual challenge would be to get all two hundred people in my direct to consumer business to all run a marathon because we all have to commit to the same goal and put in the same amount [00:10:20] of effort.

Brian: [00:10:20] Isn't getting people on the same page, you also hard work?

Phillip: [00:10:23] That's yeah, it's your job.

Brian: [00:10:24] It's the same thing. It's just a totally different...

Phillip: [00:10:26] Establishing consensus.

Brian: [00:10:27] Yes. No. I mean, that's kind of like I do that all the time.

Phillip: [00:10:31] That's what a great leader should do.

Brian: [00:10:32] And so, yeah, I know I think it's the same. I do think it's the same thing and interesting thing, though. So when [00:10:40] I was on Helens, we had really bad weather going up. It was really bad visibility. There are two parts to the story.

Phillip: [00:10:51] Is there a fable in here?

Brian: [00:10:52] Kind of. {laughter}

Phillip: [00:10:54] I'm looking forward to it.

Brian: [00:10:55] Shoot. We're back to this again.

Phillip: [00:10:57] Are you going to remember the correct [00:11:00] ending to this fable?

Brian: [00:11:01] You know what? The last one has multiple. When we were on and I told the last fable, there are multiple official endings to that fable.

Phillip: [00:11:08] All right. All right. Okay. You'd have to listen to the last episode of Future Commerce to understand what we're talking about to go back.

Brian: [00:11:13] Two episodes ago.

Phillip: [00:11:13] Go back... You had bad weather.

Brian: [00:11:14] Bad weather and we started going up. And the thing is, we were the last ones on the mountain. Well, [00:11:20] we thought we were, and actually, we were officially. Because there's a log that you have to sign going up. Anyway.

Phillip: [00:11:26] A lot of unnecessary details.

Brian: [00:11:27] No, it was kind of scary because if you are up there, there's no one behind us.

Phillip: [00:11:33] No one else up there to come find you.

Brian: [00:11:35] Right.

Phillip: [00:11:36] I gotcha.

Brian: [00:11:36] And so the weather was bad. And so we were getting up there [00:11:40] and the clouds were reduced visibility, and we had to make the decision OK, this time we're going to have to turn back. Otherwise, it's going to be unsafe.

Phillip: [00:11:52] And you kept pressing on.

Brian: [00:11:53] We kept pressing on and we got there.

Phillip: [00:11:56] There is a whole other story to this about you finding your way back in a weird [00:12:00] way.

Brian: [00:12:00] And yeah, that's the second part of the story. Anyway, the clouds did clear. We pressed forward. There's an element of like setting limitations to yourself and being smart about how hard you press. Sometimes you need to press [00:12:20] on and sometimes you need to pull back.

Phillip: [00:12:22] I don't want to interrupt you. Go ahead. Finish. Finish what you were saying.

Brian: [00:12:28] The second part of the story is on the way back down, it was clear at the top, but visibility wasn't great lower down. And so we ended up getting off course as a result. And [00:12:40] in that case, you have to press on no matter what.

Phillip: [00:12:42] Right. There's nothing you can do. Now you're committed to the strategy.

Brian: [00:12:44] There's nothing you can do but press on. Exactly. And so we ended up having to navigate through the woods with our poorly prepared setup that we had, and we ended up at the wrong place, and then we had a decision [00:13:00] ahead of us. We could either... We ended up in the wrong parking lot. It was like the summer parking lot, which is higher up than the winter parking lot, which is lower. And so we could either try to cut through the woods, which we had been doing for a while to get to the summer parking lot, which would have been one mile, or we could take the seven miles on the road and have a guaranteed [00:13:20] path back to the car.

Phillip: [00:13:22] Right. You chose the longer route, but with the guaranteed outcome.

Brian: [00:13:28] Correct. And the last three miles were in the pouring rain.

Phillip: [00:13:30] Did you see how I reframed that to be sort of adaptable to anyone's existing scenarios?

Brian: [00:13:35] Correct. Yeah. No, that's exactly the point. You nailed it. You know exactly where I'm going, which is...

Phillip: [00:13:40] Patting [00:13:40] myself on the back.

Brian: [00:13:41] No, you've picked up on exactly what I'm trying to say.

Phillip: [00:13:44] It's the fable.

Brian: [00:13:45] The fable is we picked the harder path, the longer path. I mean, it wasn't high risk/high reward. It was very clear cut, and we did it in the rain, and it was pretty miserable. But guess what? We made it back to the car in a single day, 20 miles. [00:14:00] Everything was fine, and it was awesome. And it's a great story, and I'm super happy that we went that way.

Phillip: [00:14:05] Yeah, and thankfully, nothing bad happened to you, right? You could have put yourself in some danger, but you found your way. Let me put it in into one other type of [00:14:20] a... Everyone's got the point. We don't need to belabor it any further.

Brian: [00:14:23] I'm done. I'm done.

Phillip: [00:14:24] I will say one thing that I heard recently that really made something click for me. There is a style of parenting that's becoming very popular now called gentle parenting, which [00:14:40] is something that I'm now 10 years late to because I do not do gentle parenting. I do whatever my parents did that I hated, I do that. That's how I parent. {laughter} And the instinct, when you see your kid doing something like reaching for a hot stove is to say, "No stop, don't," [00:15:00] right? So the mantra of gentle parenting is rather than use that sort of language you use affirming language like [00:15:20], "Gentle hands," or something like that. What's really interesting about this approach, Brian is making this amazing face right now, by the way. What's really interesting about this approach is...

Brian: [00:15:33] I have four boys.

Phillip: [00:15:34] That's fine. I get it. And I'm not advocating for gentle parenting. [00:15:40]

Brian: [00:15:41] You're making a point. Get to your point.

Phillip: [00:15:44] I'm getting to the point. The point is there is a a common refrain of allowing children to find their boundaries, and the common refrain is, [00:15:57] "Do dangerous things carefully." [00:16:00] If a kid is going down a slide headfirst and has his hands out, you don't have to go and snatch him up and keep him from making a mistake. [00:16:12]

Brian: [00:16:12]  [00:16:12]Yeah.  [00:16:13]

Phillip: [00:16:13]  [00:16:13]He's doing something dangerous carefully. And I think that's something that's really interesting to sort of frame [00:16:20] a lot of how we think about the way that we take risks in e-commerce and the way we take risks and especially around capital allocation, the way that we deploy capital to drive things like top of funnel. Some of these things are risks, but if we take risks and we take them carefully, they're [00:16:40] not guaranteed outcomes, but many times you're testing your hypotheses and you're learning from it. [00:16:47]  [00:17:00]A [00:19:20] whole separate side of this conversation is when we're talking about arbitrage, and we're trying to find the easier path...

Brian: [00:19:32] How many times can we say arbitrage?

Phillip: [00:19:36] I pronounced it "ar bi tra gee." Just kidding. [00:19:40] Don't ever make fun of somebody who mispronounces a word, because that means that they read it by learning.

Brian: [00:19:46] I almost wanted to make a joke that I'm not going to make.

Phillip: [00:19:48] Don't make the joke. So here's a complete left-turn tangent on this whole conversation. E-commerce is [00:20:00] at the point in its maturity cycle, and it's so prolific now that it is a science. It is not war, and war.

Brian: [00:20:10] Hold on.

Phillip: [00:20:11] Hold on. I'm serious. Let me hash this out.

Brian: [00:20:13] I thought you were going to go art, but war.

Phillip: [00:20:15] No, not art. Because art can be interpreted to be whatever you [00:20:20] want.

Brian: [00:20:20] Fine. Keep going.

Phillip: [00:20:21] War has a binary outcome, right? For the most part.

Brian: [00:20:25] Not right now.

Phillip: [00:20:26] A very timely discussion that we'll stay away from. But war, a lot of folks treat business like war. You know, they read The Art of War...

Brian: [00:20:38] "We're going to the mattresses."

Phillip: [00:20:39] Right. Whatever [00:20:40] it is. We treat it like battles, and there are battles that you wage and win. That's where the word strategy comes in, forming a plan, right? Having a lot of these strategies that we obsess over is actually a language that's formed around military maneuver.

Brian: [00:20:57] Winning.

Phillip: [00:20:58] And it takes a long time. Like think about [00:21:00] the way that strategies, yes, winning. The way that strategies used to be deployed. You know, they would send word like from commanders to position troops so that like we were ready to outflank the enemy. A lot of these were like unfair tactics that we were trying to exploit. Again, arbitrage, right? We were trying to find a [00:21:20] means of exploitation. That is not what e-commerce is. E-commerce is a science. We form a hypothesis. We test the hypothesis. We learn and then we adapt the strategy and start again. This is not war. This is a science. And if we started thinking about things from the scientific method of coming [00:21:40] up with a hypothesis, a theory that might fit the data that we see, and then finding a way to suitably test that and establishing a goal is to pass/fail as whether or not the test succeeded or failed and what did we learn from it? I think we would all be better for it and that, my friend, has very little to [00:22:00] do with where are we going to spend our money in 2022 so that we can have more top of funnel. Has everything to do with organizationally how we decide what paths we take.

Brian: [00:22:10] Yes.

Phillip: [00:22:10] Whether we take the long, hard path that has a guaranteed outcome or not.

Brian: [00:22:13] And the thing that I'm most concerned about right now, and I agree with you at a very flat [00:22:20] level. We could go into like why that is more because I do agree with what you're saying. I think it has a lot to do with power and back to...

Phillip: [00:22:29] Oh the Foucault...

Brian: [00:22:29] Yeah. Yeah.

Phillip: [00:22:30] The power dynamics.

Brian: [00:22:31] Yeah, totally.

Phillip: [00:22:32] For those uninitiated, could you explain a little bit about it? I actually find this fascinating.

Brian: [00:22:36] I was going to go from direction, but that's cool. Let [00:22:40] me just throw in a quick parenthetical statement.

Phillip: [00:22:41] Please. Yeah.

Brian: [00:22:41] And then we'll go back to that. The power structure thing. Because I think you're right, there is something interesting there, but the thing that scares me is that right now, I feel like a lot of boards are clamping down on spending, and I was just talking to someone who has good insight into this recently [00:23:00]. I'm not going to name who it was, but it's somebody, you know, as an investor for a large organization who's very active. And she said that what's happening right now is there's a huge focus on profitability, which means cutting the [00:23:20] thing that you just talked about, which is the science out of things, actually. It's cutting out the budgets that are required to test and learn. And that's nerve wracking to me. If we're cutting out the budgets for experimentation, which is really what happens [00:23:40]. When we cut out stuff, when you cut budget, when you cut marketing budget, usually the first thing that goes is the thing that's not as known.

Phillip: [00:23:50] Yes, but that's experimentation to find unfair advantage, right?

Brian: [00:23:55] Well, it's experimentation to find what's working, what will work. You just [00:24:00] explained. It's a science. The strategy is like, "Here are the things that we're going to do because these things are proven." It's like, "I'm worried that the science which is hypothesizing and testing is getting cut out [00:24:20] of budgets due to a focus on profitability.

Phillip: [00:24:22] I think I feel like that's a bunch of B.S..

Brian: [00:24:24] I don't know.

Phillip: [00:24:25] I feel like we can apply that sort of methodology and critical thinking to everything we do. It might...

Brian: [00:24:32] Sure. Sure.

Phillip: [00:24:32] It takes time, but I don't know that that necessarily...

Brian: [00:24:36] It takes budget too. That's not true. I think about the consulting I've done over [00:24:40] the years, and that takes budget. Testing and figuring things out takes budget. And investment of time of resources, which is budget.

Phillip: [00:24:54] Well, your marketing efficiency ratio assumes inherently [00:25:00] that you're spending a lot in a lot of different channels and measuring the results of those channels and shifting costs around and creative to optimize those channels performance return. So in many ways, the performance marketer is acting sort of like a venture capitalist, and you're [00:25:20] placing a lot of bets with the hopes that one or two of them produced outsized returns. So what you're saying is we might be in an environment that that is no longer acceptable or is no longer tolerable.

Brian: [00:25:37] We're going into it. And I think that... She said it changed in [00:25:40] the past six weeks.

Phillip: [00:25:41] That could be the case, and that could also be one or two or a handful of persons experiences. I see it a little differently. And that could just be that in, and I haven't had these conversations, so this is all just Phillip's own brain thinking.

Brian: [00:25:57] Sure.

Phillip: [00:26:01] Just [00:26:00] in the past five days, we've seen four funds launch to the tune of five or seven billion dollars, ready to deploy.

Brian: [00:26:14] There's money to be had.

Phillip: [00:26:15] But that is money that has to be deployed over the next 18 to 24 months.

Brian: [00:26:19] Right [00:26:20]. I agree with that.

Phillip: [00:26:21] And that capital has to go somewhere. Right?

Brian: [00:26:26] Yes.

Phillip: [00:26:27] And if you look at the amount of capital that is out there being deployed presently and has to continue to be deployed over the next 12 to 18 months, I don't think we see a blackout period over the next year and a half for [00:26:40] funding, especially where there's a lot of already positive signal. I was having lunch with a founder today, and in this conversation, he's a SaaS founder, multi exits, really successful guy raised pre seed with no deck on an idea solely based on the fact [00:27:00] that he said, "I think price elasticity testing for Amazon is an underserved market. I want to go try to solve it." And somebody said, "I don't even need to do any diligence. The mere existence of Thrasio and Boosted and all of the other Amazon rollups show me that a lot of capital is going into Amazon-focused founders and [00:27:20] businesses. That sounds like a great idea. That's where I'm going to allocate my capital."

Brian: [00:27:24] It's super smart. And I actually agree with that. I also agree, I also agree that there's plenty of capital to be had. What I do think is happening is that for capital that has been deployed...

Phillip: [00:27:33] Has already been deployed.

Brian: [00:27:34] Correct.

Phillip: [00:27:35] The possibility of a down round is something that's unconscionable at the moment, so they have to [00:27:40] be efficient with the capital they already have.

Brian: [00:27:42] Correct. And that just means investing in channels that they think are already performing well.

Phillip: [00:27:47] I'm sure some people are frustrated or annoyed and like, "We got it. We got it. We got it. We got it." Hard work is the arbitrage opportunity.

Brian: [00:27:55] That's true.

Phillip: [00:27:55] You know what? We both have come from services and agency [00:28:00] work.

Brian: [00:28:00] Yeah.

Phillip: [00:28:00] And human capital... And by the way, this is like always such a sensitive topic, especially around work/life balance, especially among a very recent conversation around the great resignation and people who find jobs that [00:28:20] fit their lifestyles. But the greatest lever that you have in an agency is billing more and paying less.

Brian: [00:28:33] Correct.

Phillip: [00:28:33] So the greatest lever that you have is getting people to bill more than 40 hours a week. Every hour you bill over 40 hours [00:28:40] a week is profit. Every. Every hour.

Brian: [00:28:43] Correct. That's correct.

Phillip: [00:28:45] If you bill more than 40 hours a week, you're not going to pay your employees more salary. You bill your clients more.

Brian: [00:28:53] They might.

Phillip: [00:28:53] Well, it depends on the structure, but on the whole.

Brian: [00:28:57] The more work you get out of your employees [00:29:00] and the less that you pay them, the more your profit margin.

Phillip: [00:29:03] That's correct.

Brian: [00:29:04] Correct. Yes.

Phillip: [00:29:07] And I mean, I feel like I'm explaining obvious...

Brian: [00:29:09] Where are you headed here? Where are you going?

Phillip: [00:29:11] I'm going somewhere.

Brian: [00:29:12] All right.

Phillip: [00:29:13] I think hard work is the arbitrage opportunity, and I come from...

Brian: [00:29:18] So what you're saying is the services model actually applies [00:29:20] to everything.

Phillip: [00:29:20] Services model where you put more work in, rather than some more work out, rather than hire that agency, rather than conduct whatever market research, rather than pay for that, you know, really high falutin consultant to come in and give you the thing, rather than taking a bunch [00:29:40] of retreats, rather than spending a ton of money on, you know, whatever fancy team building thing and having the magician on your zoom that literally nobody wants to pay attention to...

Brian: [00:29:50] Counterpoint.

Phillip: [00:29:51] All of that is will go by the wayside. And you know what actually has to be done? People actually have to just do hard work.

Brian: [00:29:57] They just have to hard work. Yeah. Counterpoint to that. Labor [00:30:00] market is tight right now.

Phillip: [00:30:04] {laughter} Ain't that true? It's so true. By the way, if you want a job, let us know Careers@FutureCommerce.fm.

Brian: [00:30:10] Yeah. And then some. I think the counterpoint is that people have, I think it's actually your qualifier [00:30:20] at the front. People do have limits and they will burn out.

Phillip: [00:30:24] But that's not what I'm saying. I'm not saying work, work yourself dead.

Brian: [00:30:32] Yeah.

Phillip: [00:30:33] I mean, I'm saying that...

Brian: [00:30:35] That's what happens to a lot of agencies, though.

Phillip: [00:30:37] Can I give you a really great example?

Brian: [00:30:39] Sure.

Phillip: [00:30:41] I [00:30:40] think that this is a great example.

Brian: [00:30:43] Is this another fable?

Phillip: [00:30:45] This isn't a fable.

Brian: [00:30:45] Ok.

Phillip: [00:30:47] I would love for your reaction to this.

Brian: [00:30:49] Maybe I'll bring a fable in my reaction.

Phillip: [00:30:53] {laughter} I often think about... I mean, this is going to be... I'm going to take a long journey here. Ok. [00:31:00] I hope you're ready. Take a sip of water.

Brian: [00:31:07] I'm already tired.

Phillip: [00:31:07] There was an e-commerce platform that was developed many years ago, called Magento.

Brian: [00:31:11] Once upon a time. {laughter}

Phillip: [00:31:15] Yeah, once upon a time. And these two guys from UCLA decided to develop this e-commerce platform. [00:31:20] All right. Brian's laughing his butt off right now. The challenge around this was how can we design the most flexible e-commerce platform, right? And they created a a really ingenious design that [00:31:40] allowed for any business to create a database architecture that would fit their business. If you sold pants online, you're covered. If you sold furniture, you're covered. What inadvertently they did was they created [00:32:00] a very complex system that created a lot of job opportunity for a lot of people, but had a really steep learning curve. And it was all in service of, "Well, we want a really flexible and open database architecture that didn't require anyone to have to modify the database itself. We never [00:32:20] want anyone to actually have to physically go in and modify the database." But this is like a core thing that you learn as a developer is how to modify a database. But it's an expensive operation because you have to take the database offline to do it. So if you're a really large corporation, that's not advantageous. So they actually did it like, [00:32:40] oh my gosh, this is like a huge accomplishment. They designed a database architecture that allowed them to create these monumental category defining database architecture designs that could be deployed with no database downtime. The problem is that it's so unbelievably [00:33:00] complex that it's slow. And the other problem is that it's so complex that you physically cannot ever modify the database. And so I'm coming around to a point.

Brian: [00:33:14] I think I know where you're going, but get there because... Yeah.

Phillip: [00:33:19] The point is that [00:33:20] a law of unintended consequences, they solved one problem and created 12. And they they did it through a really ingenious way. And this is like the nature of a developer. The nature of a developer is rather than try to solve one problem through abstraction, I'm going to solve every problem.

Brian: [00:33:39] Right.

Phillip: [00:33:39] And [00:33:40] I don't want every problem solved. You can't anticipate every one of my problems that I will have over the next 20 years, but I know how to solve this one problem. And I feel like rather than... So here's the point I'm trying to make. It allowed for a lot of flexible architecture. [00:34:00] It allowed for multi site e-commerce, right? It allowed for five storefronts, one back end.

Brian: [00:34:05] Sure.

Phillip: [00:34:06] Ok, but the cost? The cost. It turns out that the more successful play was to have the walled garden where you can't make changes. [00:34:15] The real winner in the marketplace actually turned out to be simplicity. And you know how we solve [00:34:20] for simplicity. You just do hard work. Instead of having a complicated set of systems that aggregate data for you in one place and allow for one unified panel, you just pay someone $15 an hour to put all that stuff in one spreadsheet. It's doing hard work as opposed to creating an overly smart design. I think that [00:34:40] that's the thing that technologists missed most often. We're trying to solve problems with technology, and in reality, sometimes it just needs to be solved with brute force. When are we going to get back to that? Because I think that's the actual solution for a lot of problems that we have. [00:34:54]

Brian: [00:34:54] We try to solve everything with technology.

Phillip: [00:34:56] Of course.

Brian: [00:34:57] Every case, every...

Phillip: [00:34:59] And we create 12 problems [00:35:00] while solving one.

Brian: [00:35:00] It's like edge cases drive technology and features.

Phillip: [00:35:07] If I had a dollar for every time somebody said, "Well, Shopify can't do multi site," and I'm like, "It doesn't need to. Just have five sites."

Brian: [00:35:14] Right, totally. No, no, no. I mean, I think this is true for [00:35:20] for way more than just commerce.

Phillip: [00:35:22] No, it's true for... It might be a universal truth.

Brian: [00:35:26] It might be a universal truth.

Phillip: [00:35:28] It might be a universal truth.

Brian: [00:35:28]  [00:35:28]If there's a universal truth out there, it's this: We always make things as complex as possible, a system as complex as possible, to solve for edge cases. [00:35:39]

Phillip: [00:35:40] That's [00:35:40] true. It's a pareto principle.

Brian: [00:35:42] Yeah.

Phillip: [00:35:42] For sure.

Brian: [00:35:44] This is so funny because we were at dinner the other night for Future Commerce Salon, first Future Commerce Salon.

Phillip: [00:35:52] Yeah. Could you set it up, actually? And tell us what it is and what you did?

Brian: [00:35:55] Yeah. So Future Commerce Salons are our new initiative.

Phillip: [00:35:58] What is it called again? [00:36:00]

Brian: [00:36:00] Future Commerce Salon.

Phillip: [00:36:01] Oh, like a salon.

Brian: [00:36:02] Like getting your hair done?

Phillip: [00:36:04] Am I going to get my hair done? No.

Brian: [00:36:04] Yeah. I mean, for you, that makes a lot of sense. But no, this is more like 19th century salon where you go to a gathering to be entertained and to learn and to enjoy good food and wine.

Phillip: [00:36:18] Exchange ideas.

Brian: [00:36:18] Yes, exchange ideas. Exactly, yes. [00:36:20] So I mean, that plays really well into my vanities, I think. And so we had a really phenomenal, phenomenal dinner. It was one of my favorite dinners of all time. Great wine, great food, great company, friends new [00:36:40] and old, et cetera, et cetera. It was awesome. And we had some great conversations about a number of different things. One thing that came up that kind of, there was this conversation about like what digital experiences are kind of at their core, [00:37:00] and my new thing is digital experiences are always going to be lesser.

Phillip: [00:37:06] Whoa. Whoa, whoa. Whoa.

Brian: [00:37:07] Yeah. Yeah, yeah, I know.

Phillip: [00:37:09] All right. Let's go one layer deeper. Yeah. Give me more on that.

Brian: [00:37:15] They're always going to be [00:37:18]... Digital experiences are always going to [00:37:20] be one component of an experience, not the entire experience to itself. That's what Zoom prove to us. Zoom, this past pandemic, we all use Zoom, and it's powerful and useful, but it's not the same thing as getting in person. [00:37:39]

Phillip: [00:37:39] It's not a surrogate [00:37:40] for being in-person.

Brian: [00:37:42] Correct. And I think that e-commerce, at its nature has by nature actually has a broad market application.

Phillip: [00:37:52] And but it is...

Brian: [00:37:54] It's not to say that we can't create incredible pieces of content or experiences, [00:38:00] but it is by nature a feature of the thing that we're really trying to get to.

Phillip: [00:38:06] It's the difference between, you know, going to Restoration Hardware or going to the Restoration Hardware flagship.

Brian: [00:38:13] Exactly.

Phillip: [00:38:14] Right. There is no replacement. It is itself a wholly separate [00:38:20] experience that cannot ever emulate the authentic experience.

Brian: [00:38:25] Right. And this gets into the metaverse.

Phillip: [00:38:28] Okay, I got it now. I got that. So you were talking about this at the dinner.

Brian: [00:38:30] And so luxury came up, of course, because of course.

Phillip: [00:38:35] Because the one thing that always comes is Brian Lange and luxury.

Brian: [00:38:39] No, no, no. This wasn't [00:38:40] me.

Phillip: [00:38:40] I'm just messing with you.

Brian: [00:38:41] That's not true. You were being sarcastic. {laughter}

Phillip: [00:38:45] Sorry. It's very late.

Brian: [00:38:47] So the thing that came out of that was this: Luxury is by nature an exception. Because it is always going to be in the minority.

Phillip: [00:38:59] How [00:39:00] does this tie back into the digital luxury experiences or?

Brian: [00:39:06] Well, it got back to like complex systems because we always build for the exception. So the the idea being that in e-commerce, we often look at luxury as like a leader [00:39:20] and "Oh, we shouldn't look at Amazon. That's gross. Like those experiences, no one wants that experience on their actual website." No one wants that UX. We are always like, "Oh, look at that luxury experience." And then we want to go build for that experience, which [00:39:40] we're actually probably building for the exception, which I think is really funny. Anyway.

Phillip: [00:39:50] That's no. It's serious food for thought. That's kind of the whole thought, like that's the whole thing [00:40:00] in a nutshell.

Brian: [00:40:01] Yeah.

Phillip: [00:40:03] I think we're... Let's say we are coming into an era where especially startups are going to be capital constrained because raising money means devaluing the business to some degree.

Brian: [00:40:18] You can get money, you just can't use it the way you want [00:40:20] to use it.

Phillip: [00:40:20] Well, you can get money, but it comes at a cost, right?

Brian: [00:40:22] Yeah, exactly. Strings.

Phillip: [00:40:23] And sometimes it means your prior investors are being diluted because your valuations are increasing. Maybe you're taking a down round, especially if it's... And by the way, this is like such a small subset, but this [00:40:40] is... By and large businesses that are in e-commerce that have raised outside capital are the minority.

Brian: [00:40:48] Yeah. Are they?

Phillip: [00:40:50] They have a ton of money.

Brian: [00:40:51] Wait, can you say that definitively?

Phillip: [00:40:52] Definitively small and medium sized businesses that are bootstrapped are the bulk of the long tail e-commerce?

[00:40:59] Are we talking [00:41:00] like Etsy, though?

Phillip: [00:41:01] We talking about all of the e-commerce. I mean, the millions of Shopify sites?

Brian: [00:41:05] No, no Shopify Plus sites?

Phillip: [00:41:07] No, no. That might that might account for a certain amount of of GMV volume for Shopify.

Brian: [00:41:15] It's not that much.

Phillip: [00:41:16] No, no. I'm saying like the [00:41:20] Kim Kardashian's that operate on Shopify are the exceptions. The rule is...

Brian: [00:41:27] The rule is the majority of yeah, yeah. Yeah, yeah, yeah, totally.

Phillip: [00:41:30] Yeah, the rule on Amazon is, you know, there's hundreds and hundreds of thousands of sub $1 million brands, right? And that's the majority of e-commerce. [00:41:40] They're not taking outside capital. Or if they are, they're taking it in the traditional way in the form of a loan that gets repaid. They value their ownership in the business. Anyway, it's all a farce, and, you know, everything ends and it's all meaningless anyway, everything's ephemeral.

Brian: [00:41:57] And e-commerce now is back at it again.

Phillip: [00:42:01] It [00:42:00] all always leads back to why did we just spend the last 30 minutes talking about it?

Brian: [00:42:04] I feel like I need to look up e-commerce nihilist on Twitter and figure out if that's your actual burner account.

Phillip: [00:42:13] Posting on Alt and not on Main, Baby. If you want more deep pot takes [00:42:20] on other people's Twitter rants, you know where to find it. It's found in two of the emails we send every week. We send The Senses, which is sort of a look at the news through our lens and the things that matter. It's always worth your time, comes with a bit of an essay at the end of the week on Friday. Or on a random Wednesday when I just feel like I've got to bee in my bonnet about [00:42:40] arbitrage. And you can get that at FutureCommerce.fm/Subscribe. We also have Insiders, which is a long form essay about things that you need to understand and know, and we break things down in a way that you can usefully apply that to your business like power structures and power dynamics, and...

Brian: [00:42:59] We didn't make it there. [00:43:00]

Phillip: [00:43:00] We didn't make it there. That's also its own power dynamic like the power dynamic of me needing to go to bed. You can find that, all of that, including our podcasts, every episode of the podcast you're listening to now and our sister podcast Infinite Shelf, hosted by the one and only Ingrid Millman Cordy. [00:43:20] All of this is a FutureCommerce.fm, and yeah, we'd love to have you join our community. We've got so many cool things coming up. Casting Visions as our build in public portion of our new annual report that's coming out in just a couple of months time, and that's a live stream that is taking place place [00:43:40] every week. So many things happening in the Future Commerce world. Get on it. Get into it. Just go and subscribe. FutureCommerce.fm/Subscribe. That's all I've got to say, Brian. Any last words?

Brian: [00:43:51] Time for bed.

Phillip: [00:43:52] All right. Thank you so much for listening to Future Commerce. We'll see you next time.

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