Dirk Hoerig is the co-founder and CEO of Commercetools, and a veteran of the ecommerce space spanning two decades.

In this interview, he explains “headless commerce” and why this API-centric architecture (often built atop cloud infrastructure and microservices) is especially important in the world of online retail and digital transactions, overall. He also shares his insights into where we’ll see the next wave of innovation in commerce, including on AR devices, inside our cars, and machine-to-machine in B2B transactions.

FUTURE: Let’s assume everybody is familiar with ecommerce, but what is headless commerce?

DIRK HOERIG: Headless commerce basically describes a technical pattern where you separate all of the experience layers in a shopping application — the product information, photos, videos, add-to-cart button, everything that you see and interact with as a consumer — from the underlying functionality. From a product perspective, that means that you provide all of the technologies, or functions, as a service (similar to how you might consume compute functions from Google Cloud or AWS) and then users can put any type of experience on top of them.

You achieve two major benefits from this. The first is that you’re able to run the same underlying technology applications across any kind of device or touchpoint. This is critical because, today, you don’t only have one website. You also have a mobile app, and maybe something specific for tablets. Point-of-sale systems in stores are connected, and you see commerce happening in cars, as well. Separating the logic or the functionality from the user interface makes it easier not only to connect, but also to enable each of these channels.

Secondly, you have way more freedom when it comes to creating outstanding shopping experiences. You can think of it like designing a house: You have more flexibility to build what you want when you can choose the building blocks, and move and organize the house how you would like to have it. But if your walls and doors are already fixed in place, the only thing you can do differently is change the paint.

That latter experience, where you’re walled in, would be like a legacy ecommerce platform?

“Legacy” is probably the right word, but I wouldn’t say there are just a handful of small, old, outdated systems out there. They still represent more than 90% of the market in terms of install base, as systems haven’t been replaced that often. And whether they’re 20 years or 5 years old, they’re still running on that same old paradigm, or same old legacy tech. Some products from the late ‘90s — when we saw the first commerce platforms coming to life — are still sold, just in updated version numbers. But the principle stays the same: Everything that we built in the 2000s was to imitate the webshop behavior of amazon.com.

Until 2010, mobile didn’t really matter much from a commerce-platform perspective because, in the western world, the internet penetration of mobile devices was significantly lower, less than 5%. It was just in the last five to six years that brands and retailers had to start thinking seriously about new channels and adding flexibility to their online operations.

The market is growing, consumer behavior is changing quickly, new devices are coming out fast, and customer loyalty to brands is significantly low. … So you need to up-level the experience and come up with a couple of ideas.

What’s the benefit to consumers from a headless architecture? Put another way: We all know a bad online shopping experience when we see one, so how does headless commerce help solve that?

As a consumer, you don’t realize if you’re shopping on a headless commerce platform because it’s the underlying architecture. But what you experience are two things. The first is more customized shopping experiences that feel thoughtful and inspired, as opposed to feeling like someone just checked some boxes. Secondly, the brand that you’re interacting with will be able to respond to consumer demands, or your shopping demands, way quicker.

Customers of ours are releasing new updates to their functionalities and their consumer experiences multiple times a day. Therefore, as a consumer, you always get an up-to-date experience and faster responses to feedback than what a site running on a more monolithic platform could provide.

Speaking of monoliths, there’s an industry-wide move toward microservices, as well as cloud infrastructure, as the foundations of headless platforms. How important is this architecture to what you’re trying to do?

It’s the de facto standard for consumer-experience enablement technologies because these days, in order to be successful online, you need to be highly scalable and flexible. I would say that in the whole IR500, you will not find one exception. They need to make updates to the consumer experience, ideally multiple times a day, without any downtime. That’s the No. 1 priority for achieving their business goals, and it’s very difficult to do this without a cloud native platform.

What’s happening here is that the technology team at a large company will have a huge backlog of requests from various departments focused on increasing customer retention, conversion, or engagement — you need to increase everything all the time — and they’re trying to optimize it in many very small but iterative steps. Microservices allow you to separate functionalities from each other so when you change something on the product logic, for example, it does not impact what the customer sees when they’re shopping and adding to their cart.

That sounds super easy, but older software wasn’t built for that. Everything that was built 20 years ago was created to not be changed regularly. Back then, once you had a system in place you did not change it for years. And if you wanted to make these changes, you built your platform like Amazon or Walmart did, so they could implement microservices-based architectures.

Another big factor here is scalability and availability. These days, online shopping is around 20% of retail share, growing probably to 25% over the next four years. That is significantly different than 15 years ago, when it was 4% or 5%, and when large retailers did maybe $200 million in online sales annually. Now we talk about sales well into the billions of dollars for large retailers.

Following this ecommerce boom, the market largely responded with, “Let’s put existing software onto the cloud.” But these platforms were never designed to run on the cloud. So, therefore, they are not using the cloud in the most efficient ways; they’re not making the most of the resources. I think there has to be a clear difference between what is on the cloud and what is in the cloud. Or, between cloud native development and not-cloud-native development.

Having a headless commerce architecture gives you the flexibility to work on any kind of touchpoint, device, and business model. Microservices make it so that you can develop independently and make changes — your product catalog team can make changes independently from the cart team — and then the cloud ensures that you have high scalability.

Looking at the current business environment: the market is growing, consumer behavior is changing quickly, new devices are coming out fast, and customer loyalty to brands is significantly low. If you’re disappointed with something and it’s not your favorite brand, then you will probably switch to somebody else. Customer acquisition costs are insanely high, and it’s not looking like things are going down. We’re just going into a recession, so customer retention will matter more than anything else at the moment. So you need to up-level the experience and come up with a couple of ideas. And if those are all of your requirements, I believe you need something that runs natively on the cloud and gives you flexibility on the API side.

The subscription economy, or in-app purchases, is finding its way into physical goods — how would you do that if not in a headless fashion?

It’s not just scale, right? There are also new devices and interfaces, like voice and smartwatches, as well as newer consumer phenomena like sneaker drops.

Oh, yeah. We have a customer, a large online fashion retailer that does “drops,” which generate huge demand peaks that can’t always be anticipated. So, yes, I fully agree that it’s about new business models and use cases, not just replacing what you already have with something that’s more modern.

All companies now need to think about new business models. For example, a lot of automotive companies — besides reserving and buying a car online, and dealing with aftermarket parts and merchandising — are now also doing in-car commerce, including our customers Audi and BMW. You can purchase upgrades in the car while you’re driving it, out of this navigation display panel. You can say, “Okay, give me more maps, give me better entertainment functionality.” The subscription economy, or in-app purchases, is finding its way into physical goods — how would you do that if not in a headless fashion?

There is the sheer proliferation of devices online, shifts in consumer shopping behavior, the pandemic … What do you think has been the biggest shock to the system for ecommerce over the past several years?

I think that the biggest challenge, really, was for all of these companies to figure out that they are not fast enough anymore to respond to all of the consumer trends and requirements. And it’s often that your customers don’t tell you what they want — they just go somewhere else. And, often, companies don’t realize this is happening — and what their customers are looking for — until it’s too late.

There’s a very good example from Best Buy, which a former chief architect wrote about a few years ago. They wanted to move their “Add to Cart” button from one side of the page to the other, because there was a test that said that it would increase the conversion rate a little bit. It took them about 6 months, involved lots of people, and cost more than a million dollars. But the worst thing was that it made it difficult to make other changes during the same time. Meanwhile, Amazon was pushing changes constantly and expanding its market share.

This was the biggest shock, because then you realize that there are so many things down below that you have to change. If you think about it like a car, as a retailer you want to focus on revamping your chassis — your design, your UI, all of that — but you first need to know what kind of car you’re building and what kind of condition the engine, gears, and wheels are in.

With the pandemic, adoption of ecommerce increased because more companies figured out, “Oh, wait, now we need ‘click and collect.’ But we don’t need it tomorrow, we needed it yesterday.” And then they realized, “But our point-of-sale system isn’t ready for that. We can make that change to our online platform, but it will take six months. And we’re in lockdown; we’re closed the next six months. So what do we do until then?” The pandemic put everything that wasn’t working into the spotlight.

I think most of the companies already knew it before, and if they weren’t able to respond fast enough, then it became problematic.

On the B2B side, your customers are, in their free time, consumers — and they expect a similar kind of experience for work-related transactions. Why should shopping be boring between 9:00 and 5:00, and be exciting after 5:00?

What do you think is the area that’s most ripe for innovation in ecommerce? Is it UX, backend technologies, or maybe new business models to take advantage of those technological advances?

It’s probably thinking about new business models. Of course, not everything that wasn’t working well anymore offline, or in an analog way, will automatically work well just because it’s digital. Some of the business models are just outdated and need to be adjusted. I think every company, whether they’re retailers, brands, manufacturers, or software companies like us, constantly should ask themselves, “What is my purpose here? What is the value that I’m providing for my customers, and is that a big differentiator?”

When we launched Commercetools in 2014 and spoke to our first customers, this technology was relatively new to some of them, and I had to explain concepts like API-first. I had customers asking me, “So, Dirk, that’s great. Now, we have all the flexibility that we can finally build whatever we want. But what should we build?” We were happy to help where we could, but only a business can truly understand its customers and build the strategy that will best serve them.

I think the other area that is ready for more improvement is B2B, especially around automation so there’s less human interaction, less filling out forms. Think about those analog processes where, too often, something still must be printed out, signed, scanned, and then faxed or emailed back. It’s really about business innovation and driving improvements like predictive maintenance or something similar, where a machine could detect a faulty part and automatically order it. There’s a lot of stuff where you can mix machine learning and AI with other business logic systems, and then a headless platform, to enable the whole shopping process automatically.

For example, we have robotic manufacturing customers, where our APIs are directly embedded and built into the product. So you have a machine-to-machine B2B scenario, where the commerce solution is just working as a mitigator in between the systems, and is responsible for providing the products, calculating the price, creating the cards, making the order, and so on. Once you have a headless platform, and you implemented all of that logic and functionality, you can almost use it in every type of business use case.

Also, on the B2B side, your customers are, in their free time, consumers — and they expect a similar kind of experience for work-related transactions. Why should shopping be boring between 9:00 and 5:00, and be exciting after 5:00? I think there’s a lot of efficiency on the B2B side that’s going to happen over the next two years.

Technology is getting closer and closer to our body. We already have it in our pockets or on our wrists, but glasses or other devices, if they’re good enough, will make a huge difference on everything that we are doing and how we are doing it.

What is a new technology that’s going to influence how you have to build your product, or that customers are going to require you to support?

I think there are two things, one is back-end, and one is front-end. On the back end, once machine learning and artificial intelligence get to a more advanced stage, they will help brands and retailers improve a lot of decisions. Because a lot of stuff is human-based and offline. When you look at the processes of retailers, they work with huge Excel catalogs on updating price lists and product data. And often when it comes to finding the right price, providing discounts, or coming up with the best marketing campaign for Valentine’s Day, Halloween, or something like that, it’s a very human thing. But you’d like to be able to calculate what’s working best by collecting the right data and then making smart decisions based on customer behavior.

I believe that in the next five years, getting commerce technologies like ours into a kind of autopilot mode that helps businesses make faster and smarter decisions, and automate them, will make it easier for the retailers and brands to scale and to compete. Especially those that have complex business models, are selling in many countries, and have lots of shoppers with diverse backgrounds.

The second thing is related to how the consumer market is developing. I’m talking about augmented reality, which I believe is going to be really important because it’s a natural thing that the technology is getting closer and closer to our body. We already have it in our pockets or on our wrists, but glasses or other devices, if they’re good enough, will make a huge difference on everything that we are doing and how we are doing it. It will have a huge impact on commerce.

Ecommerce completely changed with the introduction of smartphones. They’ve changed all of our behavior — how we interact with each other, how we look at and buy products, and how we inform ourselves about products, companies, and brands. This was a huge impetus for building Commercetools, because we saw that businesses needed a commerce solution that could expand beyond a simple webshop and onto new platforms. When a new device becomes as ubiquitous as the smartphone, there will be another inflection point.