Insights from European Tech Champions: The War for the Customer - The Digital Battlefield

How Zalando and Klarna turned e-commerce on its head by thinking like a consumer.

Zalando and Klarna are European tech success-stories, winning the hearts, minds and wallets of consumers over the past 10 years. Europe’s leading online fashion and lifestyle platform - Zalando and Klarna, one of the continent’s leading payment solutions providers - flipped the status quo on its head. They redefined the e-commerce experience for millions of customers. By allowing customers to only pay for goods they wanted to keep, they made a simple but fundamental change that shook up Europe’s e-commerce and payments industries.

Visa Navigate met Zalando’s David Schroeder, SVP Convenience, and Klarna’s co-founder and CEO, Sebastian Siemiatkowski, to hear how these businesses have developed disruptive ideas into dominant businesses, and crucially, how they remain innovative - despite their burgeoning size and scale.

Walking in their customers’ shoes…or flip flops

From the outset, what differentiated Zalando was free delivery and a 100-day return policy. Recognising the gap between an offline experience where customers could try on six pairs of shoes and get a friend’s opinion before buying anything, and an online experience where that was simply not available, the company got traction because it thought like a consumer and changed the game. As David Schroeder says, the ambition was always to “bring the fitting room experience to the customer’s home.”

The company worked tirelessly to deliver the proposition – famously the founders’ mobile phone numbers were used as customer service lines. “In those early years our core strength was execution not ideation” says Schroeder, but as the company grew it got “…deeper and deeper into understanding what customers really want to the point where it now tries to predict what they want before they even know themselves.”

Keeping one step ahead

Over the past 10 years Zalando has upped its game in a number of ways, building on the core proposition to stay ahead of emerging competitors. Schroeder explains that “We further optimised the factors that made us successful in the early years such as free delivery and returns, an inspirational onsite experience as well as a large yet relevant assortment. Our focus is always on further improving our customer’s satisfaction.”

Schroeder identifies three core areas of focus. First, Zalando makes as many product choice available to their customers as possible. In 2015 Zalando launched its ‘platform’ strategy and invited other retailers to sell via the Zalando website. This allows them to benefit from Zalando’s customer base while making the overall proposition more compelling to their customers. The second priority is personalisation – helping customers to find what they want within all that choice and creating a personal, relevant offering. Zalando is using data to make product recommendations based on understanding the individual and their shopping history.

Schroeder states, “Our ambition is to look at the 25 million customers we have and create 25 million online experiences.”

The third element of the puzzle is convenience – bringing the fitting room to the customer’s home. Zalando recently piloted a delivery system in Belgium based on geolocation – i.e. where your phone is. Customers no longer had to be at home or pick up a delivery; they were able to have packages sent to parks or even the railway station.

Going public unleashed innovation

Going from a two-person start-up to a 15,000 employee business in ten years required continuous innovation. It would be easy to assume that going public in 2014 would diminish the ability to do this but David Schroeder describes the opposite. “Part of our success is our trial and error culture. The IPO gave us the opportunity to invest in our ideas, even if those investments might fail, or lead to lower results in the short term. In the long term, it helps us to find new solutions and drive our business.”

Maintaining the right culture in a multinational is a challenge Zalando is taking seriously. “We made many mistakes along the way, such as that culture starts with recruitment. Personality is as important as ability,” Schroeder explained. “Another learning is that we don’t underestimate the importance of processes. The trick is to have the right ones to give as much freedom as possible so people can own their topics and act with an entrepreneurial mindset.”

Creating a new fashion ecosystem

Despite their success, Zalando remains fiercely ambitious – Schroeder describes that they want to become “the operating system for fashion in Europe.” At the core of that is building out the platform model, even turning retail competitors into partners, “We want to create a more open ecosystem for fashion and lifestyle that gives room for our partners to grow and be successful.”

Schroeder explains how offline retailers can benefit from the online business and vice-versa. Offline stores can be integrated into the Zalando platform as mini-fulfilment centres by fulfilling orders placed online, increasing store sales and allowing faster delivery times for customers. In 2016 Zalando delivered an Adidas sneaker from a store to a customer in Berlin in just 26 minutes by using this model. Schroeder is quick to point out that this approach also provides an opportunity for brands to increase footfall in physical stores by “making their product and service more discoverable on a platform with 25 million customers.”

Greater interplay between online and offline retail is a topic that excites Schroeder, who believes European retailers can learn from China where they are “creating ecosystems where multiple parties can benefit.” Schroeder concludes our conversation on an upbeat and optimistic note. “While retailing in the US and Europe is too frequently about someone winning and others failing, this doesn’t have to be the case for our platform.”

Invoicing for the digital age

Three years before Zalando started offering free returns on shoes, Klarna identified that the huge potential internet shopping afforded to merchants as a channel for commerce was not being realised. The online shopping process had too many points of friction and consumers were uncomfortable proceeding with payment then waiting to see if what they had already paid for, would actually arrive.

Sebastian Siemiatowski, who is now the firm’s CEO, explains that the traditional players in the space were not doing enough to help merchants sell in the internet era: “Visa and Mastercard were not moving fast enough to solve the problem…so we seized the opportunity by effectively offering a digital invoicing service.” Putting itself between any online buyer and seller and allowing 30 days to pay, Klarna took on all the risk and solved the problem for both sides of the transaction. Klarna’s flagship product, Pay Later, was born.

Re-orientating for the consumer

While the Klarna concept was initially dismissed by some in the business and investment world (the co-founders were told to ‘forget it’ after one big pitch), it quickly became popular with merchants in Scandinavia. As retailers signed up in their thousands and the company enjoyed success in new markets, Siemiatowski admits that the company evolved:

When Klarna started we were highly focused on the merchants and over time we realised that that wasn’t enough. We realised that the user is the customer and we had to build a great product for the customer – simultaneously of course, this helps the seller as well.”

Over the past few years this new customer focus has led to a number of eye catching innovations. As well as relentlessly streamlining the consumer journey by removing the need to repeatedly fill in data fields, Klarna has now responded to changes in the way that shoppers want to pay by introducing the option to ‘Slice it in 4’. Klarna users can now elect to slice their payments into four parts over a fixed period without additional fees or any interest charged. Siemiatowski explained: “This gives younger consumers, who often prefer debit cards over credit cards, an option to pay online that enables them to manage their finances while still being able to buy what they want.” The company now has its sights firmly set on the banking industry. Obtaining a banking licence last year, it launched a payment card which offers ‘Klarna-style perks’ such as instant notification, a statement that details what products were purchased in image form, the ability to choose and track delivery and (you guessed it), return them free of charge within an app.

Siemiatowski is ambitious and bullish about the potential to disrupt banking, particularly after the introduction of PSD2 legislation which he described as the “iPhone moment for retail banking.”

“There is a massive opportunity to change an industry. Banks have been more absorbed by themselves than their customers and PSD2 unlocks consumer data and levels the playing field.”

A problem solving operating model that relies on passion

Klarna’s core concept originated from the experience and observations of its founders but much of its recent innovation has come out of a company of significant scale that operates across borders. It relies on a unique operating model that divides the workforce into small teams of around eight people, effectively creating 250 specialised start-ups within the larger firm.

Siemiatowski is excited when discussing how the structure works. “We match small teams of people who are passionate about a problem from across the company and across competences, with the task of solving it. Accountability and passion are the drivers and that shows in the end result.” This model, which could provide a template for large businesses seeking to maintain an entrepreneurial edge is clearly bearing fruit. As Siemiatowski reflects “the funny thing is that I think our culture is now more like a start-up than it was a few years ago.”

Nobody does it better? Sometimes they do…

For Klarna, partnering has always been core to their business success but the partnering ethos goes beyond signing up retailers. Siemiatowski explains: “Many people don’t appreciate that the internet is a big economy but it is fairly immature. As the market grows, your specialisation increases so companies that were fairly broad when the market was small have to adapt – there is a big trend towards operating systems.”

It comes back to the point on passion according to the CEO. Klarna has a laser focus on solving friction points along the customer journey to drive the optimal experience, but it can’t solve them all. Where it needs specialist expertise, Klarna partners with a range of firms, including some with which cooperation might seem an unlikely proposition. A strategic partnership with Visa that was signed in 2017 is demonstrative of this approach. Siemiatowski reveals that “customers were coming to us and saying they wanted to use Klarna everywhere – we had the opportunity to address that in a simple way via the Visa partnership which gives us that reach.”

Takeaways

The rich examples of Zalando and Klarna tell us a lot about successfully disrupting in the digital world. At the heart of both propositions is a clear solution to a problem – a solution designed around how customers want to engage and do business, not sellers.

Second is the fact that these businesses constantly innovate. In different ways they create a culture that inspires their people to think about how they use their skills and experience to solve the next problem (and the one after that).

Finally, it is clear that both businesses have benefitted by recognising what they are good at and knowing when it is better to collaborate in order to deliver the best service to consumers. Cooperation is not always cosy but in the age of elevated consumer expectation, it can be the best way to win.

Visa made a strategic investment in Klarna as part of this partnership which was announced in June 2017

All brand names, logos and/or trademarks are the property of their respective owners, are used for identification purposes only, and do not necessarily imply product endorsement or affiliation with Visa.

Find out more about how Visa’s Retail Experience Lab guides our innovation process and keeps the consumer at the centre of our thinking: https://www.youtube.com/watch?v=gxirL047JuY