Better mousetrap

Ecommerce is a notoriously unforgiving category in which the slightest bit of operational inefficiency can mean the difference between sustainability and insolvency. There are quite literally thousands of things that can go wrong with the simplest operations. But perhaps nothing is as painful – or common – as running out of stock in a hot item, leaving customers unsatisfied and revenue on the table; or, by the same token, over-ordering an unwanted product and being forced to eat the costs.

Serial entrepreneur and former Wesabe founder Jason Knight knows this firsthand thanks to growing up in an brick-and-mortar retail family. In Knight’s estimation, a typical ecommerce business spends approximately 20 to 30 percent of their budget on overhead, 40 percent on marketing, and 20 to 30 percent on inventory. But while there’s tons of software tools focusing on the first two cost-centers – driving operational efficiency and acquiring customers economically – few if any solutions exist for optimizing the third.

“Everyone focuses on getting people to their website, but there are few tools available to answer the question, ‘Do you have the products on your site to satisfy this customer once they get there?,’” Knight says.

Expensive enterprise demand management solutions exist, helping companies like Wal-Mart understand when to reorder merchandise and in what quantities to avoid over- or under-stocking wherever possible. But unless a business is generating $100 million or more in yearly revenue, these solutions are of out of reach and impenetrable. That’s why Knight created Sluice, a SMB-focused solution aimed at merchants with between $1 million and $100 million in yearly sales.

Appropriately, the name Sluice comes from the mining world and means “any contrivance for regulating a flow from or into a receptacle.” Knight hopes that his new data analytics platform will help merchants not only visualize and interpret their demand data, but also offer prescriptive advice on what action to take to maximize ROI.

“Our goal is to help shorten the decision loop around buying,” Knight says. “We can come in at the product level and figure out what’s going to sell out over the next ‘X” time period so that merchants never have a stock-out or give customers an excuse to buy from your competitors. Ultimately, we want to back everything out to an ROI; to tell our customers that for every $1 they spend, this is how much you’re gonna make.”

Los Angeles-based Sluice launches into a closed beta today within the Amazon marketplace ecosystem. The advantage of piloting the product within Amazon’s walled garden is that Knight’s software can see more detailed data than on other platforms and thus better calculate, for example, the true cost of running out of stock of a popular item.

“Amazon isn’t the end all, be all,” Knight says, noting that platforms like eBay and Etsy also hold significant appeal. “But it’s the first place we can really prove our results. In the Amazon universe, we don’t need ‘big data’ to be effective.”

When merchants sign up, Sluice gets access to four months of Amazon historical sales data and rapidly begins making recommendations. With one small merchant participating in its alpha launch, Knight says that Sluice was able to increase daily sales volume from $150 to $2,500 in a matter of two weeks, an increase of 1,600 percent. While these results are anything but typical, he admits, they are instructive of the potential for effective demand management. Knight predicts that revenue increases of 15 percent or more and commensurate profit growth will be commonplace with wider adoption.

The current strategy for many Amazon merchants is to cast a wide net, Knight says, testing an ever-increasing number of SKUs under drop-ship fulfillment in search of the right product selection that can ultimately be brought under in house. The problem is, most SMBs have no idea how to interpret the data generated in this type of test and thus have no idea where do double down and where to cut their losses. Sluice aims to automate the vast majority of the reordering process.

Sluice is a SaaS software product priced according to a company’s yearly revenue. While the company has not finalized pricing, Knight suggests that a company generating $100,000 in monthly revenue will likely pay on the order of $60 per month, while a company generating $200,000 should expect to pay less than double that.

One major challenge in the early going will be market education, Knight predicts. It’s a fair bet given that few SMB merchants even know that demand management is possible, let alone are proactively looking for solutions of this type. Unlike Salesforce and many other enterprise software platforms, the Amazon Marketplace doesn’t have an app store where merchants can discover new software tools either.

“There’s a small area for marketplace sellers where Amazon will list some apps, but they take a very hands-off approach,” Knight says. “The seller forums do have areas for vendors to promote software.”

Another problem is getting to the right decision-makers within an organization. “This is a product for buyers, not for marketers,” Knight says. “And buyers rarely buy software today.”

The goal in this early beta phase is to add two to three new merchants per day and develop case studies around each. The more ROI-lift the platform can generate, the easier Knight’s sales pitch will be when he begins asking customers to pay for his software.

“When a merchant logs into the system and gets to our home screen, the first thing he sees is LRPD – lost revenue per day,” Knight says. “We track and make it painfully clear how much money you lost today and over the previous 30 days due to out of stock items.”

Assuming Sluice is able to demonstrates the power of its demand management platform – still a fairly sizable “if” given its early stage – the next version of the product will offer what Knight calls demand sensing. He believes that Sluice can ultimately help merchants determine not only how to reorder their current products, but what other products they’re not currently stocking that their customers regularly purchase elsewhere. In effect, it’s “data-driven merchandising.” Finally, the goal is to extend this beyond Amazon.

“On the demand management side, a sale is a sale, so meaning our solution can be easily ported to any other ecommerce platform,” Knight says. “On the demand sensing side it will be more difficult because every platform has a unique model for things like members, followers, favorites, etc.”

Sluice has been completely bootstrapped to date and Knight has no plans to raise outside capital if he can avoid it.

“I hated doing it with my last company, so If I can avoid it, I’d like to never need to raise money ever again,” he says.

It’s been nearly two decades since merchants began selling online, but nonetheless the industry remains underserved when it comes to software tools. And with the shift to the cloud transforming the software industry in parallel, ecommerce optimization is largely a greenfield opportunity. In this way, Sluice has limited competition, particularly in targeting SMB customers. But that’s something that could change rather quickly.

It’s still early days for Sluice and there are unanswered questions around the very effectiveness of its product and Knight’s ability to generate awareness and demand within the merchant community. But there’s little arguing that online retailers could stand to be more efficient and better informed when making purchasing decisions.

It’s too late for Sluice to save the thousands of ecommerce startups that have tried and failed. But with investor cash once again flowing into the sector and consumers shifting more and more of their spending online, the timing couldn’t be better for someone to build a better ecommerce mousetrap.

[Image via Telovation]