Mental models I’m using to imagine a new world order

Article 1 of 3: Channel maturity & Brand outcomes

“The only certainty is that nothing is certain” – Pliny the elder and then proved mathematically by Heisenberg.  

One of the perks of the VC job is that you get to play “crystal ball gazer” to try and predict the future. I’ve been approached regarding my views on ‘implications of AI in Consumer and Commerce businesses’ by far too many friends in the past few months. And I’ve walked away from each conversation learning more than revealing (another perk of a VC job).  

I wrestle unsuccessfully with putting it all together into a cohesive “opportunity set” and hence I fall back into the next best tool – a set of mental-models for myself. If not to predict, then to at least recognize when I see a good opportunity.  

I’ve had to step back from being enamoured by AI to create these mental models. Look at Consumer and Commerce from a historical perspective. It also took me down nostalgia town where I spent hours on YT reminiscing the Ads I grew up on in the 90’s. Here’s a great compilation.  

I’m putting these half-baked frameworks out in the world – In the hope that smarter people will correct me and help make these anti-fragile. Sticks and stones may break my bones, but your opinions will help write my thesis. J

Lets begin.

I started with a set of 20 questions – came down to 4 after discarding a few and postponing the rest.

1. What’s the relation between brand outcomes and new channels?

2. Can AI create a new channel? And where will it come from?

3. What does this new channel look like?  

4. Where can monetizable value be created by AI in B2C?

This is Article 1 – where we cover Question 1.  

Mental Model 1: Channel maturity and Brand outcomes

Here is a badly drawn chart that’s intentionally not to scale. Rather that distracting myself with amplitudes and thresholds, I wanted an easy to recall mental model.

The X Axis: Maturity of the channel.

Assume a new channel of communication and/or distribution has entered the market and its maturity evolves with time.  

The Y Axis: New brand creation / Valuable brand outcomes

I implore you to be forgiving in my description of the Y axis. It is purposefully vague to capture the essence of “is some exciting value creation opportunity unlocking in consumer brands”.

Now that we’ve outlined the axes, here’s my observation/read. There are 5 phases depending on maturity of the channel for brand value creation – ‘A’, ‘B’, ‘C’, ‘D’ and a phase not on the chart which I’m naming (oh-so-creatively) ‘E’.

Please note that there may be some “evergreen channels” – Offline is one such case. In that case let’s mentally push the “t” on X axis to infinity (or till a pandemic changes life on earth more permanently – in which case we have bigger problems to solve than figure “brand outcomes” J). I’d assume in that scenario there will be multiple rounds of “D” phase innovations.  

Phase A: Existing brands that realize arbitrage and move fast

A fancy new channel has come in. A Maverick brand manager sees the potential faster than the others and milks it for lower CAC. The brand sees some quick value capture and either changes strategy to play in Phase B or loses the edge over time.  

Note that in this phase not much has changed in the underlying communication or product. It is simply marketing arbitrage. The next phase is much more interesting.  

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Phase B: New Brands built around the Communication-modality of the Channel

New brands come in distinctly catering to the unique communication modality of the Channel. The product may not necessarily be differentiated, but the communication modality has completely changed to reflect the unique nature of the new channel.

Think of the TV ads did for Unilever, Pepsi and Cadbury. The product was always available, but the TV ads were well thought through (even scientific) and created crazy arbitrage. The formula was simple “Ensure the video Ad was attention-grabbing and the product is front and center. Then ensure the same product is clearly visible at your local Kirana store.”  

I’d assume you can do several things real quick inside Unilever, but changing the product packaging is not one of them. Think of how long Fair & Lovely looked more or less the same. Till they changed packaging (and their sales took an immediate beating).  

TV allowed for innovation in how you communicate, and in Phase B brands succeed by changing their communication strategy to take advantage. I argue that Mamaearth and Boat are great examples for Phase B brands for their respective channels (D2C/Meta and Amazon/FK).  

This utopia doesn’t exist for long. There is a real “first mover advantage” in Phase B.

C: Copycat brands trying to leverage OR new/new-to-channel categories

Over time the channel enters Phase C. Too many brands try to enter the channel and category blowing up CACs taking marketing efficiency to the dumps - rendering future cashflow projections useless. Phase C is a declining phase is not much fun.  

You better have a 10X differentiated product to win. New-to-channel categories/price points could see healthy outcomes. A great example here is Veeba and their MT, GT journey. Fogg is another example of 10X product communicated through incumbent channel (TV).

I was inclined to think that this is it – now we wait for the channel to die and new “plumbing” to emerge a new channel. But as I delved deeper, I realized there is another phase of Value capture which I cover next.  

D: True channel first in Product and Communication-modality

New communication and distribution channels can also create new product strategies. There is an opportunity to build a truly “Channel backwards product and communication strategy”. Some of these ends up capturing significant value in Phase D.  

Why? By phase D consumer behavior on channel is established – viewing, usage, retention etc are established and this unlocks data. Data and retention/remarketing info can lead to new brands that are channel first.  

Think Naaptol (TV), Shein (D2C), HRX (Myntra), Rebel foods (Swiggy, Zomato). Each one of them was built channel backwards and innovated in both their product and communication strategy (vs Phase B brands that majorly innovated in comm strategy). I’d argue Decathlon does this for Offline.  

E: Decreasing channel relevance – Will require true material science/cost innovation

Here you need true product innovation – typically material science or technological innovation in production, supply or substitution to unlock value. Everyone loves these brands – look no further than Apple for best in class.

Validation and proof points

Summary table to validate the model – some of these are leaps-of-logic and may not be a 100% fit. That’s never stopped me from conjecture. J

My pov on communication and product modality by channel is captured in the table below. I’ve restricted comments to Phase B and Phase D which are of key interest from a value creation standpoint.  

A new AI channel = great outcome for new brands; But there’s an assumption here

This cycle of A, B, C and D phases are going to start again with the advent of AI first channels. The logical conclusion is Phase B will usher in brands that completely absorb and revel in the new communication modalities AI unlocks – it will then create copycats (phase C) till “AI-first” B2C brands rule the roost in Phase D. I’m excited to see this unfold – and see if the framework holds water.  

But I hand-waved my way through a BIG assumption - will AI create a new channel? Not all new consumer facing technologies create new channels. What does AI promise that creates a strong case for a new channel? What’s the nature of AI and what problems can it fix? I take on this (even more ambiguous and arduous) problem statement next – in Article 2.  

Spoiler alert – I think it will. J

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