Unless you’ve been living under a rock for the past 5 years you’ve probably heard about a little thing called flash sales sites. Well … maybe not so little. It seems that, according to Gilt founder and ex-CEO Kevin Ryan, the flash sales sites you’ve probably heard about, such as Gilt, Fab and Rue La La have been doing great with turnovers between $100 million and $1,69 billion.
These are all new fresh companies so how come have they managed to grow so fast? How do they work? What is the business model and who are the most prominent players on the market?
Let’s start with number one:
What are flash sales sites?
By now you may have pretty clear idea that flash sales mean generously discounted merchandise. It may be fashion, home products, electronics or others. Customers expect flash sales sites to deliver well .. cheap(er) products.
The whole idea is by no means new. Brick and mortar stores used to and still do it from time to time (usually seasonally) in order to unload overstocks. At some point someone realized that there is a business opportunity there:
Say you have a dozen retailers each having 10 products that went unsold in the previous seasons and they want to get rid of all these stocks. They can either deal with all the hassle of organizing a sales operation to unload extra stocks or someone can just buy the whole merchandise, at an even lower cost and then resell it and turn a profit.
At first companies buying these products didn’t need to sell it at a discounted value. They would just buy the whole unsold stocks and try to sell it (they were usually successful) on a different market. Example: buy discounted merchandise in the US and sell it in Eastern Europe where last year’s collection is not only “good enough” but “great”.
In time the whole “moving to a different market” operation proved to be a little too complicated, with global recession, countries getting a little more protective with their own economy and so on. So a new business model came up:
How do flash sales sites work?
Flash sales develop a large targeted potential buyers database, test these potential buyers to see which is the right product mix and then buy unsold inventory and resell it at a large discount. Sometimes – they don’t even do that. They just attract potential customers to several discount offers which become active when a certain number of buyers is reached. They ensure this way that they are able to purchase the merchandise without reporting losses.
The logistics in this business is a little tricky if you are dealing with “volatile” stocks and can sometimes turn to frustration from customers as orders sometime take weeks to arrive.
However, when purchases are made, flash sales sites customers are more likely to buy again, according to this study. Customer lifetime value increases 385% for flash sales sites, whereas traditional online retail shows an increase of “only” 94%.
So – business is a-booming. Buyers flock around flash sales sites, they buy more than on traditional online stores and the business model seems to be more stable than Gorupon’s.
Who are the champions and who are the contenders? Let’s start with number 5:
Which are the top largest flash sales sites?
Ruelala had a dashing growth in the previous years but few know it is part of GSI Commerce, which in turn is a subsidiary of eBay so yeah, Ruelala is part of eBay.
One Kings Lane.com is a place where customers can get a great curated product mix for home. The revenue was roughly $200 million in 2012.
The award for the largest flash sales site goes to Vente-Privee, which has had a 40% increase in flash sales in 2012. Their sales went up to € 1.3 billion (aprox. $1.69 billion). They’re living large. So large that in order to celebrate this great feat they bought a theater. No, really.
How big are flash sales?
Now, if you’ve find flash sales interesting, you might head over to this link right here, where you can have a look at an infographic showing more information on the subject at hand.
eCommerce has really picked up pace in the last ten years and is on its way to becoming a really serious competitor to classic retail. Needless to say, many companies jump the ecommerce wagon. Some are internet savvy, some are retailers with many years of experience or, in the most fortunate case, both. However, that most fortunate case is usually rare. The internet and the classic commerce are still, for most of us, worlds apart.
The main reason ecommerce is still a pretty damn hard thing to do is it takes a lot of know-how regarding both commerce and the internet. When starting or expanding an ecommerce operation you will be faced with decision regarding management and sales platform, marketing (“do I do Social Media, should I go for Search Marketing or maybe Affiliate marketing?”) but also more real-world issues such as “What are the products I will be selling?”, “How do I store these products?” or “How is my product going to reach my client?”.
While there are many, many variables and data you will be faced with, you still need to keep an overview on the most important factors that will make your ecommerce business successful or not. Here are the most important 7:
Choice of Products and Product Display
Search (yes, search)
As you notice I have not mentioned marketing. Marketing makes a difference when all those above are working well together. That is not to say marketing is not important. It is. Unfortunately marketing cannot save you when your store isn’t performing its base functions.
Further on, keep in mind that as an eCommerce company you are first and foremost a technology company. If you are a classic retailer this part will be the hardest thing to wrap your head around. You use technology to deliver products at the best price and with the best customer care possible. As such you need to stay constantly focused on market changes (your product market) and technology changes (think how important search engines are for online-first businesses) and adapt those changes to your 7 pillars of ecommerce excellence, as follows:
1. Choosing the Product Range and Product Display
What makes Amazon such a great business? One might argue things like “Wide variety of products”, “Great prices”, “Fast delivery” or “Great customer experience”. All these, and probably more, are true. All these make Amazon the leader in US’ largest online retailers but I would like you to focus on the following screen:
What you see there is my recent history on Amazon (I am quite fond of eCommerce, as you’ve probably noticed). Now if you would be Amazon you could basically market anything to anyone (well, almost anything to almost anyone). Why? You can show your customer a version of your product choice based on his or her particular interest, particular history of browsing and buying.
So with Amazon basically each customer gets his or her own version of the store.
But you are not Amazon. You don’t have the same product choice, the same data, the same infrastructure. You will need to create a specific product choice and focus on your specific niche.
Ex.: Say customer X wants to buy a computer. Where would he go? Probably to an IT related online store. Say he needs to buy a mouse after he bought the computer. He would, if the first shopping experience was good, go to the same place and make an additional purchase.
If you are not Amazon you will need to make a clear choice regarding your product range. You cannot be a fashion retailer and also deliver groceries. It just doesn’t makes sense. It doesn’t make sense business wise and it doesn’t make any sense for your customer.
After you have chosen your product range you will need to expand it. Say you started by selling clothes. There are a few product categories that would go great with that type of products:
Once you got that settled you will notice that there are specific ways you will need to display your product. As a fashion retailer you will need models and show your customers how those clothes would look on them. Such a choice of display won’t make too much sense if you would be selling, say, laptops. No one actually cares how they look when typing, unless they own a Mac and they are typing in a Starbucks.
2. Stocks Availability
Picture this: you are shopping in your favorite brick and mortar store. You’ve just tried on a couple of jackets and you’ve found that one, great looking, discounted, jacket. You have it in your hands. You have the money. You head over to the cash register and take out your credit card. Surprisingly, even though you’ve spent the last 20 minutes searching for it, trying it on and then deciding to purchase it, the item is not actually in stock.
That is not very nice, isn’t it?
Customers feel tricked when they try to purchase something that is not actually in stock. That usually happens when your warehouse stocks system aren’t synced with your ecommerce site. It’s really frustrating and you need to make sure that never happens to your customers.
Key take away: Keep your stocks updated real time.
Pricing – how do you do it? Do you just go ahead for the smallest price possible? Should you rather adjust your price according to the market and the other competitors?
Pricing should take you in the shortest time to a profitable operation. The pricing operation is mostly an internal decision (the price should first depend on your OWN resources and costs) while still trying to keep up with the market. Here are several things you should consider while looking at your pricing options:
You will probably not turn a profit from the start. As such – focus on creating a competitive price that will, at some point help you turn profitable.
DO NOT go for the lowest price on the market. Try to earn customers by offering discounts, vouchers, having a great customer care and a great product range. Anything but the lowest price. That is always an unsuccessful choice. Of course – you will get a couple of customers but these are not really the customers you are looking for. Plus a low price usually means a very low profit or loss. It’s better to have a slow but steady increase in customer base than a fast increase that will, in time, bankrupt your business.
Keep in mind the operational costs. While most startups focus on technology and marketing costs, they usually overlook many operational costs such as staff, warehousing, shipment and others.
Think highest possible price instead lowest possible price. Keep in mind that you are not your marketing. While you may want to be seen as a low pricing company you need to maximize your profit. Find the best balance between profit and managing to stay competitive in the market.
Shipping is an important part in your business. Doh! It is, for best or for worse – the most important physical contact your customer has with your company, unless you also have brick-and-mortar stores. You should make the best of it.
Here are some ways of making a great impression with shipment:
Treat the delivery box as the most important part of your visual and physical identity. Because it is. Have a look in the right hand area at this ASOS box. It has a clean, functional design, it’s beautiful and people love receiving it. The experience is close to receiving a gift, as most have already paid for their purchases. Don’t spoil the experience.
One size shipping DOES NOT fit all. Adjust your shipping model to your market. If you are delivering groceries people will expect them as soon as possible (usually within 24 hrs) and are willing to pay to get this. If you are a discount shop people are willing to wait a little bit longer as long as they know they get a better deal.
If possible – offer free returns. It’s great when trying to build trust. People will think the pros and cons of buying from your web store and a free return is a great incentive.
5. Customer care
This is one of the most important pieces of building a strong, reliable eCommerce brand and, unfortunately, one of the hardest to manage.
While CRM (customer relationship management) systems and technologies have improved greatly, most of what your customers would call customer care still relies on people answering calls, people delivering merchandise, people in charge of packaging. People, people, people. Customer care is about bringing the right kind of people on board, making sure they understand what makes your company great and making sure they always do their best in handling customer needs.
It’s a hard thing to build. Good customer care is subjective. However, there are a couple of things you can do to improve your chances at keeping your customers happy and returning:
Build a culture around your customers. Make sure that anyone involved in your ecommerce operation knows how important it is to keep customers happy. After all, it’s not like jobs depend on it. Oh, wait. They do.
Make sure you track your customers purchase history and make this purchase history as clear as possible to your call center operators. You won’t be able to attain a perfect score. Just don’t ruin your best customers’ experience.
Don’t judge your customers. There are no “dumb questions”. There are no calls that take too long. After all, if Zappos can handle a 9 hours and 37 minutes phone call, you can spend a few extra minutes with those who buy your products.
In the end customer care is actually treating your customers friendly, polite and helpful. If you can manage that , you will build a great shopping experience.
While it could be a little awkward to add search, basically an ubiquitous and often overlooked eCommerce feature, it actually is one of the most important tools in helping your customer reach its desired product as fast as possible, without hassle.
How many items are listed on Amazon? Millions. There are so many products that Amazon decided that it didn’t need just a search engine “feature”, but a search engine program. At launch A9, Amazon’s Search platform, was rumored to be a competitor to Google but it turns out Amazon just wants to guide its customers as efficient as possible to the products they are looking for.
Don’t underestimate the importance of search. We live in a search-engine era where we need to find what we are looking for in matters of seconds. If your search feature doesn’t do that, maybe its time to work a little bit more on that.
Remember: as an eCommerce company, you are a technology company. I will say it again. You are a technology company. Get used to it. Now – as any technology company, you need not only keep up with market developments such as mobile commerce or social commerce, you need to lead the way.
The largest eCommerce companies lead by innovation. Weather it is Amazon’s Kindle, Ebay’s Market Place or even AliBaba.com’s online payment system, Alipay – they all innovated their way to the top and continue to develop to stay there.
These are the top 7 most important factors that make or brake eCommerce companies. Focus and improve each one of them but remember that commerce has always been about a) delivering products, b) at a great price, c) before and better than anyone else. It still is. We’ve just added a layer of technology on top of it.
When it comes to online retail conventional wisdom states that customers will choose the virtual over brick-and-mortar store mainly because of the price. While this may be true , it’s only partially true. Price is a big factor and probably the most rational factor when it comes to shopping online. However, choosing online shopping takes more than the rational.
Above you can see a chart on a recent study by PWC, that shows some of the reasons driving customers to shop online. Lower prices and better offers is the second most important reason people will buy online followed by the speed factor and things like better variety and better product information.
So – if you are managing, owning or part of an online retail operation, you should know your customers motivations.
Here are the top 5 reasons, other than price, that drive people to buy online:
1. Shopping online is convenient for anyone, anytime.
The usual trouble with business hours is that they are the same for pretty much everyone. Both shoppers and retailers. While movies portrait people as care-free, on-the-go individuals, the reality is that much of the time people are either stuck in an office, stuck in traffic or just at home, spending time with the family. Say customer X remembers he needs to buy a new pair of shoes at 2 PM, while still at work. Will it be possible for him to drive to the closest store? Will he just go online and buy his favorite pair of shoes, from a wide selection of brands and offers. Of course it’s the latter which brings us to …
2. Shopping online is easier and less stressing
Think about shopping centers. Picture the people, the crowd, the options. Hear the noise. Now think about looking for a parking space, walking to the mall, walking some more from store to store. Trying on. Maybe going home empty handed.
Now picture doing all that in front of the computer, listening to your favorite music, comparing the best deals, without anyone trying to convince you what is the perfect fit. Shopping online is just easier. Customers choose it because it’s stress-free, it’s rational and you can get the best deal without spending a whole afternoon looking for a pair of pants.
3. Shopping for products unavailable in the near area
Not longer than 10 years ago, most shoppers would have had to choose between the products available in the nearest store or not buy anything at all. There was no “shopping for that special bottle of wine I saw last year in Paris”. If the local wine store was not selling it, well … it simply wasn’t worth the hassle to look for it anymore. Now consumers can just “google” a particular brand or product and someone, somewhere, will be ready to sell it and ship it.
4. It’s easier to compare offers
To be fair, this one has a lot to do with price but than again comparison and especially easy comparison is a matter of convenience rather than pricing. Comparing prices online is way easier than any of the options offline stores have.
5. It’s just so much better to talk about
Remember the last time you talked about visiting a store while chatting with your best friend? Probably a long time ago. Truth is conventional retail stores are just so … available to anyone. Uninteresting. Common. You cannot brag about a new, indie, never before heard store that still offers a lot of products. Shopping online is just much more conversation-worthy.
Conclusion:if you are selling online – please don’t focus solely on price. It is so yesterday.
Tomorrow is all about Big Data and how best can you handle it. See, companies don’t need more data. Most medium to large companies either have the data or ways to get it easily available. The problem is – most of them don’t know how to handle it.
Here comes the boom: Predictive Analytics is *the thing* nowadays. Long gone are the days when merely registering data, processing it and acting upon the findings in the next fiscal year was enough. Right now the fastest growing companies register data, analyze it and respond to it in real time.
Predictive analytics and predictive personalization – how do they work?
We all leave trails behind. Our shopping habits, our marital status, our social groups, the shows we watch and gadgets we buy – all these and much more are trails and they are in some database, somewhere. Using this data, or whatever is available at any given moment, predictive analytics software can determine our future actions through two types of programmed responses (it’s a little bit more complicated than that, but you’ll get the picture):
1. Rules Based Personalization – “If this than that”. Basic personalization. Ex.: Customers click on an ad, enter our website and we can determine they are from New York. Let’s show them our stores in New York first. They click on our product catalog, select the high-priced products. Bang! We now know they have a medium to high income. This kind of responsive personalization does not really make use of any kind of predictive analytics. It just reacts to actions. It does not try to predict them. This is a job for…
2. Predictive Personalization – this is something we, humans, can do easily. Machines, not so much. Let’s say our sports store has a sales person with a decent IQ who’s at least a little bit interested in the customers checking out the merchandise. He notices customer X has tried on at least a dozen of sports shoes in the last hour. He walks to the customer and asks him “Hey, can I interest you in this brand new snowmobile? It’s 10% off“. Oh, wait that is stupid. That just what old-time ads would do. He would actually ask the customer if he can help him find some shoes that fit and look good. That’s basically what Predictive Personalization is all about: 1. Analyzing the data real time / 2. Using context to pinpoint the best potential recommendation and 3. Personalize the output.
In case you were wondering – yes, there’s a little bit more science to it but the previous example shows what the buzzword stands for. If you are interested in the subject or you’re a future Predictive Analytics Expert you can have a look at “Personalized Recommendation on Dynamic Content Using Predictive Bilinear Models”, on how Wei Chu and Seung-Taek Park of Yahoo Labs used Predictive analytics to recommend better content on Yahoo’s front page.
Why companies use Predictive Analytics to stalk their customers?
You know why Facebook stalking is so easy? Because people want other people to know about their interests. The Millennials, the digital natives, generation Y – they are today’s youth and they are born and living online. They offer their info, they share their interests, they make their photos public. No more mass message. Each and everyone expects to be treated as an individual.
Companies that do not “stalk” their customers are going to be left behind: Amazon is personal, Facebook is personal, Google is personal. Most of the top online retailers are personal and they make customers’ shopping experience unique.
How about offline? Yes, 5 years ago we couldn’t have had any kind of Predictive Analytics or Personalization offline but the iPhone changed that. Now smartphones fill the gap between the data stored online and offline activities. Companies are now tracking consumer behavior through mobile activity and make use of predictive analytics to address individuals needs and wants … well .. individually.
Acting on data is not enough anymore. It’s acting on data NOW that’s important.
Less than a couple of years ago Facebook Commerce seemed to be inevitable. It just seemed one of those things that are just waiting to happen. Yet it didn’t. After a promising start, e-Commerce’s wonder child just stopped being interesting.
How did that happen? After all – so many were jumping the wagon and everyone was just eager to tap into Facebook’s social market. Well … Facebook’s IPO happened. Its market cap dropped. It got dizzy and greedy. All of a sudden Facebook stopped being a revolutionary product. It stopped valuing its users, be them companies interacting with customers or users (sometimes) willing to have a virtual conversation with a company.
Facebook got greedy and careless
In may 2012 Facebook introduced “Promoted Posts”, marketed as another way for page owners to advertise their pages. It slowly, but surely, grew into a steady source of income and a few months later the company allowed page owners to promote pages not only to fans but also friends of fans.
It didn’t stop here. Sponsored stories were introduced in august 2012 and suddenly Facebook Walls stopped being ad-free.
Meanwhile, the Big Daddy of all social networks thought … “hey, there’s a lot of spam out there and people kind wanna spam each other on Facebook too. What if … “.
5 minutes and absolutely no second thoughts later, Facebook introduces … get ready … the option to send unsolicited messages to complete strangers. If paid. Wait a minute … isn’t this spam? Oh, yes it is.
While allowing advertisers to post ads on walls of people completely unconnected to their page, send messages to anyone on Facebook, whether they opted in or not, and generally ignoring the concept of privacy, the company still has the nerve to say … “The problem we face with the news feed is that people come to Facebook everyday, but people don’t have enough time to check out absolutely everything that’s going on” (Will Cathcart, Facebook’s News Feed Product Manager).
Really, Will? Really? So basically I, a Facebook user, don’t have the time to check everything. Unless it’s paid for and then I have the time to check it, even if I never subscribed, liked, opted-in or even thought about that particular piece of content.
Facebook has very long term strategy and short term tactics. How about something in between?
Given this approach, where Facebook showed absolutely no consideration for either users or advertisers, it was of no surprise companies were going to pull back a little bit on their Facebook spending. Facebook Commerce, potentially one of the greatest streams of revenue the company could have tapped into, given the rise and rise of online commerce, was badly affected.
Payvement, a company providing retailers with access to F-Commerce features, just announced it will shutdown Payvement and its partner website Lish.com. The market reacted quickly to the news. Media’s backlash focused on Facebook Commerce but the bottom line is not just about commerce. It’s about Facebook’s vision. We know Mark Zuckerberg wants his company to usher in a connected world, with no communication restraints and no privacy. We also know that those who invested in the company early on are now pushing for financial results. What we do not know, and probably Facebook’s management doesn’t either is – what is Facebook all about? Now.
In order to address F-Commerce issues the company may need to take into account a different perspective on its product and market. It has to address some issues such as:
1. Pages should reach their full audience. Free.
Right now the usual Facebook page post reaches approximately 7% of all fan base. Let’s say a Social Media Manager has the audacity to wish for its message to reach all of its fans. Remember – these are people that willingly pressed the “Like” button, knowing that means they will receive updates.
In the mean time – Facebook decides reaching the audience is unethical if unpaid for. Yet if you are a brand and you are willing to pay you can reach your audience easily. And their connections. And their inboxes. And soon enough – their mobile phones.
What is wrong about this is that Facebook never mentioned anything about promoted posts or limiting reach when the companies were developing their Facebook pages through ads, Facebook contests, Facebook content and others that were directly beneficial to the social network.
If you were a large retailer you would think twice before moving your ecommerce operations to a company that neither cares for your business nor does it have any clear development strategy.
2. Facebook.com is just a tool.
The social network concept is out there. Facebook is not innovating anymore. At least nothing useful and visible. Soon enough it will be replicated by a company with a better vision and greater care for its users and advertisers. It is not the first social network and it certainly won’t be the last. Judging by current events Twitter and maybe MySpace (the new one is just amazing) might actually stand a chance at Facebook if they keep on this way.
3. How about thinking before rolling in the changes?
Facebook is an engineers company. Trial and error was fun back in the day and it probably worked when there weren’t 1 billion users actively using it. If you think about it, Apple is also an engineers company but it evolved a human approach. They listen to their customers, even when they are not speaking. Unlike Apple’s, Facebook’s customers, the advertisers, are not really glad about their purchase.
How about the company puts a little more effort into improving its user and customer experience and less into imposing new features that usually help no one?
Facebook needs to think a little bit more on its overall strategy. It really has to figure out what the “F” in F-Commerce stands for. Mark, you gathered 1 billion people, you got this far, don’t “F” it up!
“I just love this iPhone I bought three years ago”… said no one ever.
Any Apple user knows that there is no way to keep an iPhone or iPad for more than 2 or 3 years and still be happy about it. If you’ve ever bought an iPhone or iPad you know how it goes: you buy the new product, you fell in love with it (it works just great, it looks awesome and everybody wants to see or touch it) and before you know it someone at Apple unveils the new version.
The new version is never something revolutionary. It’s usually just “innovative”.It does have some small, incremental upgrades, just enough to call it a “new” product, but there is no actual need to switch over, unless you are one of Apple’s executives. However, next thing you know you start loosing your signal, apps crash, and you’re not feeling so good about your once loved device. But nothing changed. It’s the same device, it has the same specs but all of a sudden – it’s not good enough.
So you go and buy the new one (it’s never cheap) and you feel this is the device you are going to pass on to your children. Buuut… Apple decides to launch another next year and it’s back to the Apple Store.
Well – there is a reason for this cycle to happen. The reason is profit. In order to keep the cash coming Apple, and any other large company for that matter, needs to keep its customers coming back to buy more. There is no stopping the money-making machines. Profits need to keep coming, people need to keep buying. Otherwise we stumble upon recessions.
Actually, that’s how the term “Planned Obsolescence” got coined. Mr. Bernard London wrote “Ending the Depression through Planned Obsolescence” in 1932 as a method to stop the chaos resulted from overproduction and surpluses. He stated that the Government should impose a certain Planned Obsolescence on products, so customers would keep coming back and buy more, therefore restarting the economy.
The Phoebus Cartel
Although the theory was not the smartest and most popular thing written in that period it was one of the ideas floating in the mainstream. Such an idea was pretty good for a bunch of companies to form the Phoebus Cartel in 1924.
Some of the companies that formed the Phoebus Cartel you probably have heard of: Phillips, Tungsram, Osram, General Electric. What did “Team Light Bulb” stood for? You guessed it. Profits. The companies agreed, among others, to impose an 1000 hrs lifetime threshold on all light bulbs sold. Those that allowed their light bulbs to run for more than 1000 hrs were fined by the corporation controlling the cartel.
You may recognize this as what we now call “Planned Obsolescence”. Yes, the concept has been incorporated 89 years ago.
Good thing the Government stepped in and saved the world. Oh wait… it didn’t. The Cartel’s operations were only stopped when WWI started.
Planned Obsolescence makes its cross-industry debut in 1954…
… when industrial designer Brooks Stevens used the term to show that people want the “new thing”, whether it is a newly designed car, or the latest TV. He showed that companies can and should integrate, first and foremost, stylistic upgrades to their products in order to keep their clients coming back to the store and buying more.
You should note that planned obsolescence comes in many forms but the most popular and cost effective is style obsolescence. You can see this in the automotive industry (where companies redefine their stylistic approach every 3-5 years), the fashion industry (yearly cycles of stylistic obsolescence) or the IT industry where Apple seems to be the undisputed champion.
Apple is not the only company using planned obsolescence to sell more. It’s just the best at it.
All companies that look forward to survival and profit need to have some kind of obsolescence built into their products. The alternative, in the present economic system, is the company’s demise.
Apple understood this early on when Steve Jobs came back to the company with a vision for the connected ecosystem. He thought of a network of devices that would serve the customer’s every day needs for information and connectivity.
With the Apple connected home all of the products work seamlessly with one another. Once the customer has bought the iPod, he will buy the iPhone, than the iPad, than the Macbook. And that is just the hardware. There is an army of developers that use the AppStore to offer the newest apps. iTunes brings the world’s library of music and movies closer. As a result, in time, the customer gets locked-in and has little or no option to move his data or purchase options to the competition.
This was the big innovation Apple brought to planned obsolescence. It usually works within monopolies or at least oligopolies. You need to have very little or no competition to make sure the customers don’t just switch sides when you force them to upgrade their products. Apple has managed to bypass this: it’s not a monopoly, it’s just a monopoly for it’s own customers.
One more thing: Can the world handle planned obsolescence?
There are many reasons this practice isn’t helping anyone in the long run. First off – it leaves customers/people ever dissatisfied and unhappy. There is now settling for a certain product, and there is no lasting pride or meaning in acquiring so much (in time) useless objects.
Secondly – the environment can’t handle so much waste. Even though some countries have started regulating the disposal of old electronics and home appliances we are a long way from a real solution for the waste our consuming habits leave behind. We keep buying, losing interest and throwing away our old products. We are still decades away from product cycles that plan recycling and reusing as part of the product’s life cycle.
Last but not least we cannot afford to buy so much products. Planned obsolescence is a direct cause of consumer habits we cannot afford. Credit has left present and probably future generations in debt yet most companies still think they can thrive on this fake growth. But for how long?
Amazon has already changed the way we think about online retail and its influence and disrupting force of change and inovation has just began to sink in. The company reported a $48.07 billion revenue in 2011, making it by far the largest online retailer, followed by Staples and Apple ($10.6 billion and $6.6 billion respectively). The company started by selling books and later expanded into CD’s DVD’s, MP3, ebooks but also jewelry, electronics, furniture, apparel and even food. Here are some of the reasons why Amazon is going to be a game changer in offline retail in the following years.
Lack of innovative competition.
It was probably Jeff Bezos visionary strategy that led the company but it also had something to do with established industries refusing to change. As you probably know it was Amazon that bet big bucks on eBooks and eBook readers but it was the lack of competition that made it so successful in that department. While the team at Lab 126, Amazon’s Kindle research team, was working hard to launch its first viable product, the competition was ignoring or at most distantly observing the emerging market. It took Barnes&Noble 2 years to launch Nook, after the first Kindle hit the market.
After eBooks proved to be such a successful story Amazon moved on to selling what the market demanded – tablets that run an Android powered, Amazon flavored operating system, allowing the company to research consumer preferences (by analyzing Kindle Fire web traffic), and most important – selling apps. As a direct result of this move Amazon is now the largest Android apps seller, closing in to the iTunes AppStore.
Amazon has a few tricks up its sleeves
Amazon is not just a retailer. It is a brand loved by customers partly because of its previous underdog image (long time gone as it is estimated to overtake Walmart by 2020) and partly because it sells things people love – books, music, apps even jewelry and furniture. But there is more. Here are some of its “to be loved” products:
1. Amazon TV
Amazon is known for selling media. Books, music, video – it’s all media. Why not join the soon-to-be-trendy market for digital TV? It has already shown it can use it’s market share to launch a digital product that streamlines media consumption (the Kindle) – so why not TV?
The company’s model features low cost (even under production costs) hardware retail as a way to create an infrastructure to deliver content profitable so TV might just be the natural choice in post-Kindle business development.
2. Amazon Offline stores
Amazon Lockers is the first step toward an offline presence. It may sound strange but Amazon will need to create offline stores in order to tackle the offline retailers. Why? Online retail is big and is growing fast but if you look at the bigger picture it is still only 8.9% of total retail revenue, even in the US.
Such a bold move may be a little different than what we expect. Brick and mortar stores have basically stayed the same for the past century so maybe there is a need for a change. Amazon Lockers may be the store of the future, not just an experiment.
3. Amazon’s private label
So far Amazon worked as a rather large market place for all kinds of products and suppliers. It may be time for the company to tackle some of the largest and most profitable companies in the world. There is speculation of an Amazon private label, that could produce everyday items such as personal care, child care or clothing. Such a bold move would really be disruptive as the competitors in this market are P&G, Unilever and others such.
The global economy can’t handle the “classic retail”
The global supply chain puts too much burden on consumers. P&G’s margin was down from 25% (dec 2008) to approximately 7% (dec 2012). To handle the global operations, marketing costs supporting dozens of brands and still turn profit in a recession means that P&G’s products must start with a rather large margin, supported by mass market advertising.
Amazon is a different kind of business. It doesn’t need large margins. It’s flexible and fast. It can adapt and can tackle markets even before incumbents notice it as a threat. My bet is that Amazon’s influence, not only on retail but on global economy as a whole, is just beginning to show.
The internet has made possible what power structures have tried and, usually, failed to do throughout the history: knowing everything there is to know about their citizens. Now there is no need for anyone to ask us for information – we gladly give it away and we are doing this in larger and larger numbers.
Think about the first time you’ve connected to the internet: the sheer amount of information available was dazzling. You could travel the world in a few seconds without leaving your home. Everything other human being seemed closer than ever and things looked pretty safe as you were just one of the other millions of people connected to the internet. Anonymity instilled a sense of freedom that was not possible in the real life.
Years have passed, the internet improved, the number of internet connected users increased exponentially and some companies started wondering – who are this users and how can we find out more about them? Apparently – pretty much.
We had a look at how companies use large data to improve their marketing efforts. Facebook and Google are some of the biggest data-handlers in the world and by offering free web services such as social networking or search these companies gather hundred of millions of users on a daily basis. These users have certain interests, profiles, friend connections and are willing to give away all this information without much thought.
If, say, a Coca-Cola representative would approach us on the street and started asking us questions regarding personal data, interests in different areas,information about our friends we would be rather skeptical, wouldn’t we?
Actually that’s what basically happens every time we search something on Google, update our Facebook profile, read an article on the web or simply send an email. Even though some information is anonymized, even though there are laws that may interfere with privacy breaches, the truth is there are some companies that hold real time information on large masses, information that can be used either at a macro or micro scale. From individuals to countries such companies know a lot of things and became increasingly good at harnessing the power that lies in these bits of data.
Micro and macro implications
On a micro level individuals basically offer some of their most intimate information to companies that use it for marketing purposes. There is a saying stating that “if you are not sold anything, you are the product being sold”. That holds true to both companies mentioned above. There is no secret Facebook and Google make most of their revenues through advertising. To help increase advertising efficiency both companies need to know as many things as possible about the person viewing the ad.
Both companies thrive on information users offer, knowingly or not. Whether is the page you are viewing, information on your Facebook profile – you tell advertisers how to better sell their products.
Another implication of sharing so much data is that you become predictable. Even though we look at ourselves as unique, special individuals, the fact is we are not. We are creatures of habit and habits turn into patterns. When some important events in our lives happen our behavior is even more likely to become predictable. Target used customer data to find out when their buyers start dealing with pregnancy. Based on a series of products future mothers are more likely to purchase they managed to target those exact customers, sometimes even before their friends or family found out.
You might think that companies and other organizations can track you only if you choose to use your real identity. Actually no. There are several techniques developed to help deanonymize internet users. One of these techniques is based on stylometry, the analysis of writing style. Although information on this subject dates back a few centuries, the internet made possible the analysis of large chunks of data.
Be it your blog, your Facebook profile or movie reviews you posted online the fact is you leave traces on the internet through your writing style. Even if you publish a text anonymously and make sure you are not traceable by classic means, stylometry can point towards you. Arvind Narayan, a computer scientist focused on “breaking data anonymization, and more broadly […] digital privacy, law and policy” explains here how this can happen, what are the necessary steps, what are technological requirements etc.
Although micro implications are interesting, they are just the tip of the iceberg. With enough data anything is possible. And I mean everything. Think stock markets, military, health and epidemic research, economy, global intelligence. Basically all the power structures our civilization depends upon can find large data extremely interesting.
In 2010 China routed traffic intended to some very discrete US organizations through its servers for roughly 18 minutes. “Not too long”, one might think, but enough to cause a 300 page report for the US congress. If 18 minutes worth of internet traffic routing caused such a stir, imagine how much of an impact information passed through Facebook and Google have on the global political scene.
With enough data stock market crushes and bubbles could be predicted, social movements could be news before they even happen, just like military strikes or economic crises. One thing is for sure: there is great power in the data provided by users online.
In my last post I talked about the shift in consumer targeting that happened once the Internet went mainstream. Several highlights were the short history in consumer targeting, information regarding Amazon’s personalized recommendations and Apple’s usage of consumer data to increase music and app sales.
Now we’ll have a look at how two of the largest and fastest growing technology companies use consumer data and behavior to deliver ads. As Facebook and Google’s business model heavily relies on advertising they have to make sure ads are delivered efficiently to increase revenue.
However, trying to increase ads relevance and user experience can sometimes lead to unexpected (?) outcomes. Both companies had had their fair share of legal troubles regarding users privacy. For example last year Facebook user tracking practices lead to a request by US congressmen for the Federal Trade Commission to investigate the company. Apparently Facebook would track users web traffic even after they logged out. By linking browsing history, location and time of visit to account information (list of friends, preferences, browser) the company could potentially extend its user profiling to some very intimate data. Apparently the issue was corrected and now Facebook stopped linking browsing data to user profiles. Even so, the anonymized data can provide the company with some very good insights.
What are Google and Facebook’s revenues?
As stated above both companies rely heavily on advertising revenue. 96% of Google’s 2011 $37.9 billion revenue came from advertising. Industries that pumped most money in Google’s Adwords program were Finance and Insurance ($4 billion), Retail ($2.8 billion), Travel and Tourism ($2.4 billion) – source.
Meanwhile Facebook reported “only” $3.1 billion in advertising revenues last year. Even though the numbers are visibly lower than Google’s, Facebook advertising revenue increased 69% and topped Yahoo in 2011.
Having established that online targeting leads to generous revenues, let’s have a look at how Facebook and Google manage to efficiently target consumers using technology:
How does Facebook target users?
Facebook increase in popularity coined the term “social media”. This term describes web and mobile platforms where organizations or individuals communicate through different types of media (text, image, video etc.). As more and more users started using Facebook the available content increased, social links improved as users added more and more friends.
Facebook recognized the opportunity in consumer targeting using social preferences (Ex. “Your friend likes X Brand. You should too.”). Interestingly Facebook managed to give user profiles a real – life feeling by encouraging people to bring their friends along. Of course few people could recognize nicknames such as “MickeyMouse1982” so users started adding their real names, than their birthday, location etc.
Soon enough Facebook had a few hundred million demographic profiles at hand. These profiles were interconnected so influence groups could easily be determined. In a genius move Facebook introduced the “Like” button and later “Share”.
By using the “Like” button users would essentially hand over to Facebook their personal preferences.
As publishers saw that articles posted on Facebook were more likely to become viral and increase traffic they adopted the Like/Share widgets and later the Facebook Connect signup system. As these widgets could track user behavior by transferring traffic data back to Facebook the social network now knew what users were interested outside the platform.
Combining this data Facebook launched and improved in time their Facebook Ads platform. With more than 20% of all web traffic plus data on web traffic outside its social network, the company could potentially target ad delivery better than most other media companies. Let’s review what kind of data Facebook has at its disposal to target users:
consumer demographics: users enter their demographic information during signup or later as they use the social network
social networks: Facebook knows who is a friend of who, who is more likely to have his or her posts liked, shared or commented on. Basically it knows who is most likely to influence their peers actions with a granularity almost impossibly to achieve by others
consumer preferences: every time a user clicks a like or share button, comments, posts a status, photo or video it basically signals Facebook on some of his or her preferences regarding a wide array of things (music, products, news) that could later be used to show relevant ads.
web traffic: by tracking user behavior through like, share or social widgets Facebook registers data that even anonymized can show insights on a scale that no other company can
These are the most important factors in Facebook efficient ad targeting. Weather advertisers choose to use classic ads, sponsored stories or promote several posts the company takes into account this data to maximize exposure and engagement.
How do Google ads become “contextual”?
Probably the most disruptive technology company in the past two decades, Google relies on user data, behavior and semantics to deliver the contextually targeted ads.
To deliver ads, Google needs data. Where does it get it from?
Where does Google get data from?
indexed and ranked web pages: even though the number is not really known as Google is secretive about its data centers, it’s estimated that indexed data is stored in more than 30 data-centers. These data centers hold 35 to 50 billion pages at any given time. They are ranked according to an algorithm initially designed by Larry Page and Sergey Brin and improved in time.
web page analytics: Google Analytics is used by more than 10 million web sites. As Google hosts data regarding traffic and user behavior on these sites it can predict user behavior and ads most relevant to potential consumers.
email information: even though information is anonymized Google makes good use of mails hosted on it Gmail platform. With more than 350 million users in Jan 2012 the data flow through Google’s emailing platform is astonishing.
searches: Google responds to almost 3 billion searches every day. By analyzing searches and user paths Google can determine what are the most popular search results and how can this information be used to optimize ad targeting and delivery.
Google+ is the company’s response to Facebook’s rise in popularity. It already has more than 170 million registered users (mostly active). Having answered the need for information in social networking targeting Google further improved its advertising targeting capabilities.
Android is Google’s mobile operating system. Though buggy at start, Android is now on its way to world domination in terms of mobile operating system.
Basically Google knows a lot about a lot of potential consumers and uses these data to increase efficiency in ad targeting.
Having a look at how the likes of Amazon, Apple, Facebook and Google use research and targeting , we can surely say that conventional (old ?) knowledge on the matter is becoming increasingly obsolete. As technology replaces human input research and targeting becomes real-time.
Unfortunately some privacy issues arise when people become “users” or “consumers”. On this matter – soon.
Conventional (TV, print, radio) advertising often relies on research and targeting methods such as focus groups or demographic targeting to increase brand awareness and sales. These methods seem to be more and more outdated as targeting technology is already delivering better results.
A (very) short history of advertising research and targeting
In the past, as media was unidirectional (broadcaster to consumer), there were few ways retailers could efficiently target potential consumers. Advertisers would use consumer profiles and split purchasing options through demographic indicators (age group, location, education, sex etc.). By using statistic results they could outline marketing opportunities for certain demographic groups (Ex. “Women between 25 to 35 years, urban, having higher education are more likely to buy Product X”).
Having (theoretically) discovered a potential consumer profile they would then buy media in newspapers, radios or TV stations that would best appeal to that certain demographic group.
Of course this is just a skeletal description of the whole targeting process but it explains the process pretty well. Many companies have benefited greatly from this targeting and advertising system. Most of the brands we now know and buy were built this way. Even now, decades after the likes of David Ogilvy were setting up the rules on research-based advertising, the system is virtually unchanged.
“I notice increasing reluctance on the part of marketing executives to use judgment; they are coming to rely too much on research, and they use it as a drunkard uses a lamp post for support, rather than for illumination.” – David Ogilvy
How did the Internet change research and targeting?
Few could have predicted the impact Internet was to have on commerce and economy. Even less would have guessed how this initially “exotic” media would impact research and targeting.
20 years ago there was no marketing concept that could explain AdWords targeting and not be considered science-fiction.
Internet targeting and advertising renders most of conventional knowledge on research obsolete as technology has achieved what was once impossible. 30% of all human population is now in reach of all advertisers and they can now target more than just demographics.
Behavioral marketing is a concept that could not be possibly be achieved with conventional media. Using consumer behavior rather than demographics advertisers can target real time preferences and individuals rather than demographic groups. Say a user is known to have previously visited a car dealership website. He then browses websites in search of reviews on different car models. The car dealership could potentially target this exact user and serve him the most informative ads. Advertising ROI is sure to increase this way.
Some companies have become increasingly good at Internet research and targeting. One of them is now the most valuable company in the world in terms of market capitalization. Let’s have a look at how Apple, Amazon, Facebook and Google use large data to target and monetize consumer traffic.
How did Amazon, Apple, Facebook and Google changed consumer targeting ?
Amazon personalized recommendations
Amazon is well known for its personalized products recommendations. How can it do this? Short answer: large data on consumer purchases and mathematics. Longer answer: Amazon holds a patent on its product recommendations which you can have a look at here (issued in sept. 2006). Although rather technical it focuses on certain key elements:
user profiling: Amazon holds valuable data on user demographics and previous purchases. Using this data it can map users in specific consumer groups. User profiling combines shopping cart contents, item ratings and recent purchases as purchase intents seem to change in time.
similar products information: say you bought three SF books. Similar products would be other books in that category. Some of these books would be more popular in terms of item ratings, reviews, views and purchases.
item affinity is the probability of some products to be purchased together. Say you are buying a Kindle on Amazon. You are very likely to buy a cover or case to protect your device. That means these products have a high affinity index
driver items are those products that are most likely to drive traffic to store. Again – the Kindle, Amazon’s best seller is not only a driver item but also a platform that insures further product purchases.
user path: the consumer will follow a certain path until it ads a product to the shopping cart or confirms a purchase. These paths are very important as they can be used to “guide” consumers to products they are most likely to purchase.
Using these information (and probably more) Amazon can first map users in consumer groups (1), extract popular, affinity and driver products (2), compile most profitable user paths based on previous history and other users actions (3) and than recommend the items most likely to increase basket size.
Recently Amazon announced the launch of its Kindle Fire product. This product is built on a Android platform and uses a proprietary web browser called Silk. The browser optimizes web traffic by routing it through Amazon’s servers. As Amazon already holds information on user profiles (users will have to login to synchronize their book collection) and now data on web traffic it can further improve its recommendations.
Apple Genius recommendations
Although Apple does not explicitly state it monitors iOS user actions it doesn’t deny it either. If it does, however, it might access a huge pool on users data such as web traffic, mobile purchases, locations, call history, social networking information (through access to contacts information, call history, SMS and iMessage history etc.). Basically everything there is to know on its customers profile.
For now the most visible way Apple uses data to increase sales is iTunes Genius, the music and video recommendation system. iTunes Genius uses purchase history and iPod activity to recommend potentially interesting songs, albums or videos.
Although iTunes Genius probably uses a system similar to Amazon’s it is not yet known to be as accurate. The performance issues are probably connected to the number in customers and items on sale. Amazon has a wider products inventory and a larger pool of potential customers. This leads to a larger database and increased accuracy.
Technology based companies have changed the way we think of consumer targeting and advertising. Innovation lead to profits and behavioral targeting will probably develop in the future. Tomorrow we’ll have a look at how two of the largest advertising – revenue based companies, Facebook and Google, use large data to improve consumer targeting. Stay tuned.