Category Archives: Commerce

Payment Data Is More Valuable Than Payment Fees

We are in the midst of a great revolution in the payments space: anyone with a phone can now accept credit cards; online-to-offline commerce is allowing online payment for offline purchase and significant friction is being removed from the consumer purchase experience thanks to mobile. All of this innovation (read: competition), combined with government intervention, means that payment fees are falling, threatening revenue streams for incumbents and startups alike in the payments space. But a broader opportunity exists: using the data of payments to build a more valuable, more defensible business model, one not dependent on fees. The result will revolutionize offline commerce and online advertising.

Today: It’s All About Fees, and They’re Heading Towards Zero

Payment companies make money by charging fees to “process” a payment from buyer to seller. Square charges 2.75% (or $275/month for volume up to $250K/year). PayPal Here charges 2.7%, as does Intuit GoPayment. Groupon and Amazon are both supposedly working on their own dongles, and prices will continue to fall, especially as these new devices create “one-sided” networks without significant defensibility outside of switching cost and inertia. “Pay with Square” is a potential game changer, as the millions of Square user accounts can ONLY be used with Square. But basic “acceptance of credit cards” is becoming a commodity where prices will keep going down.

Competition between payment companies is only one leg of inevitable downward pricing pressure. Government intervention is the other. Not too long ago, the Australian government decided that payment fees were too high, so now most Australian merchants pay less than .5% for credit card swipes, a fraction of the cost here in the US. The European Union is likely to enact similar legislation. The Durbin Amendment of Dodd-Frank and the $6B+ (pending) Brooklyn Settlement are US-based government and civil attacks on the business of payment fees. Many of these fee-cutting regulations help intermediaries like PayPal and Square short term, by reducing their cost (owed to the Visa/MasterCard infrastructure), but eventually it limits what they can charge, too.

Wherever fees end up, most merchants will still dislike paying them. They are a “cost of doing business” that every merchant has an incentive to bring down. Payment companies generally aren’t delivering new customers; they’re taxing the flow of existing ones. Google effectively charges 20-30% to deliver a customer (if you back out the cost-per-click to percentage of realized sale) to an ecommerce merchant, yet merchants are competing to hand Google more money because each dollar “in” produces more than a dollar “out.” Payment companies charge a fraction of Google, but are often despised (witness the lawsuits and legislation) or treated with promiscuous disrespect.

It comes down to something rather simple: Connecting the bank accounts of buyers and sellers will never be as valuable nor defensible as connecting buyers and sellers. Google delivers customers at the top of the funnel, and payment companies serve the prosaic, but necessary, task of shuffling funds at the end.

Tomorrow: Payment Data Will Revolutionize Commerce & Advertising

As society goes increasingly cashless, payment companies will have a larger business, and a more valuable one, in closing the loop for offline transactions and helping deliver customers. The data they possess is without equal; did somebody buy something? How much did he spend? What did she buy? Paper money cannot be tracked in this manner. In order for Online-to-Offline commerce to take flight, every merchant needs an ability to track online/mobile action to offline purchase, and PayPal Here, Square, GoPayment and others could provide just this for a whole new class of small merchants.

Imagine that Wendy’s, or even a local handyman, wants to advertise on the Internet. What’s the point? What does a click, or an impression, really mean? It’s clear what it means online, since every click can be measured to “action” (e.g., purchase) for an ecommerce company. Who can tell Wendy’s, or the local handyman, if that online advertisement worked?

In an increasingly cashless society, the answer is pretty clear: the payment infrastructure. Tracking that purchase back to the originating source (Google? Yelp? Patch? etc) is known as “closing the loop” and will revolutionize offline commerce and advertising alike.

The million-plus merchants walking around with Square, PayPal Here, and GoPayment dongles want more customers, and these dongles provide a means to “close the loop” and let those merchants acquire more customers, remarket to those customers, understand those customers, and do everything that ecommerce companies have taken for granted for over a decade. Legacy POS systems were poorly integrated and insufficiently verticalized, often requiring a merchant to have separate relationships with every player in the payment chain (hardware vendor, merchant bank, CRM system, etc); moreover, they were priced out of reach of the sole proprietor.

Beyond closing the loop, payment companies can utilize data from existing transactions to generate more transactions. Companies who maintain a direct relationship with the consumer — such as American Express, PayPal, Square, Discover, etc — are in the perfect position to serve as an Amazon recommendation system for “everything.” You bought a tennis racket at Sports Authority? How about tennis lessons with Saul the tennis pro, at a discount thanks to your purchase of a tennis racket, only redeemable with the same payment instrument? You weren’t searching for Saul, and you wouldn’t want an unsolicited email from Saul, but seeing an advertisement for Saul shortly after buying a tennis racket (say, on your purchase receipt) would likely produce a response. It’s a way topreeempt search for a large class of “secondary” purchases (e.g., charcoal after buying a grill; tennis balls after buying a tennis racket, etc), in a “pull” based way.

None of this is to say that the fees charged today are wholly unreasonable and unconscionable; they’re just not long-term defensible as more parties offer the same conduits to existing credit card infrastructure. I have $40 cash and five credit cards in my wallet right now, so any merchant wanting to charge $100 for some widget can either get 97.25% of $100 (if using Square), or $0. That’s an easy decision and shows why things like Square and PayPal Here are hugely beneficial to merchants and consumers alike. But longer term, as those fees continue to compress to the benefit of merchants, the larger business will be in applying the data of payments to the benefit of merchants, consumers, and payment providers alike.

Service as a SKU

(Originally guest-written for TechCrunch)

The biggest ecommerce opportunity today involves taking offline services and offering them for sale online (O2O commerce). The first generation of O2O commerce was driven by discounting,push-based engagements, and artificial scarcity. The still-unfulfilled opportunity in O2O today is tantamount to tacking barcodes onto un-warehousable services by standardizing and normalizing the units being sold, something I call “Service as a SKU.” Just as Amazon figured out how to build the best warehouses and technology in the world for delivering boxes, somebody will do this for “unboxed” services, with customers driven not by discounts or scarcity, but rather by the Internet’s hallmarks of customer experience and convenience. And unlike how “ship stuff in a box” ecommerce seems to be gravitating towards a few winners, Service as a SKU is still a wide open playing field.

The idea is to turn every service, or unit of commerce, into what retailers typically call a SKU (Stock Keeping Unit). Imagine the following as “items” you can buy, and have “delivered,” with a simple click or tap:

“1 Unit of Plumber-Fixes-Your-Leaking-Toilet”
“1 Unit of Dentist Fixes Your Crown”
“1 Unit of 12-Inch Hole-in-Roof-Is-Fixed”
“1 Unit of Piano Tuner Tunes Your Piano”
“1 Unit of Set Up a Home WiFi Network”

Groupon and LivingSocial, early leaders in O2O commerce, started a wave I wrote about a few years ago, but have historically focused on discounting and creating demand by artificial time or quantity scarcity. There are two main problems here:
-Adverse selection: Groupon et al tend to attract customers looking for deals. This is not what Amazon does, and not how most consumers shop for necessities (e.g., fix my toilet!).
Push v Pull: Groupon et al tend to rely on “push” (e.g., email) to drive a tremendous amount of sales. Unlike Google, eBay, Yelp, or Amazon, people don’t tend to go to Groupon “unprompted.”

To successfully create a SKU for every service, you need to normalize both the service provider (price/quality) and the service being rendered. It’s more like buying produce than buying something mass-produced in a factory. Or, perhaps more accurately, it’s more like booking a hotel reservation, where the rooms are anything but identical, there exist varying degrees of quality, but there are also quite a few commonalities.

The company that pulls this off will need to have the following:

-A seamless scheduling system, deployed at various service providers, to allow real-time inventory management. OpenTable does this for restaurants, and hence can provide a marketplace for “tables” at You can’t sell boxes without knowing how many items are in your warehouse; you can’t SKU-ify a Service without knowing how many hours are available.

-A trusted ratings system to allow for normalization of services and parsing of consumer feedback. How do I compare a $100 “fix my toilet” plumber to a $175 “fix my toilet” plumber? Ideally this will work like hotels: every service provider has a “star rating” and an associated cost. Hotel rooms are reasonably similar; consumers can choose between a 5 star hotel or a 2 star hotel, and even different star levels have significant variance. Yelp and Angie’s List have tremendous assets in their community-based feedback, although payment companies like PayPal and Square have perhaps an even better potential asset on their hands (chargeback rates are a good proxy for merchant quality, every completed transaction can solicit quality feedback and not just from aggrieved/fanatical customers, etc).

-A no-discounts, no-push site. OpenTable gets people looking for restaurants, and needs neither emails nor discounts to make that happen. Yelp, Google, eBay, Angie’s List, and Amazon are all contenders as they all have consumers “coming back” unprompted. If the product and site are sufficiently convenient, this often happens organically; having a well-designed and convenient search, shopping, payments, and redemption experience avoids the need for push marketing.

-Relationships with offline service providers. Despite the flash nature of Groupon and LivingSocial, their merchant relationships are significant. Yelp has virtually every business profiled but perhaps not every business engaged in an economic relationship.

It’s important to note that Service-as-a-SKU is not lead generation for offline services, nor is it just a glorified scheduling platform. “Leadgen” has been around since the beginning of the internet, but there is no standardization or normalization, not to mention the convenience of “one-click” purchase. There are leadgen services for housing relocation, laser eye surgery, insurance, etc, but none let you actually make a purchase online. The hard part is in “normalizing” to create a single “service item” that can be scheduled, paid for, and “delivered” with a mouse click or smartphone tap. As an example, Uber has done this for black cars, and EXEC is fixing hourly prices and limiting SKUs to low-wage labor services.

At 8:01 AM on June 26, 1974, a shopper named Clyde Dawson bought the first item — a 10-pack of Juicy Fruit gum — to ever be scanned with a UPC (universal product code). Today, barcodes are a part of every mass-market product bought and sold throughout the world. You won’t see plumbers, dentists, limo drivers, or gardeners walking around with UPCs on their backs, but we are poised for another shopping revolution of equal magnitude.

Say Goodbye to the Long Tail of Product Resellers (online)

The 1980s and 1990s witnessed the slow death of the “mom and pop” general store, replaced by superstores like Walmart that sold everything from butter to guns.  Regardless of one’s position on this trend, it makes classic economic sense: by buying in bulk, Walmart commands better prices with suppliers, and then passes on lower prices to consumers. (Walmart has even been accused of “predatory” pricing to drive mom and pop stores out of business, raising prices after their disappearance.) By aggregating every product under the sun, Walmart can lure consumers in to buy staples (sometimes sold at/below cost), and cross-sell them other impulse items.

There’s one primary reason why Walmart hasn’t completely taken over the world: geography. is a drop in the bucket compared to Walmart’s offline retail presence (remember that people spend far more money offline than online). Some communities keep Walmart out, New York City being one such example. And some people just live far away from Walmart.

But nobody can keep UPS or Federal Express trucks away, and the Walmart effect is going to be even more extreme online. This time Amazon is the big gorilla.

Consumers traditionally shop at retailer A versus B based on the intersecting calculus of five variables:

Price (actual price to consumer + “friction” in ordering process)
Geography (proximity to consumer)
Selection (do they have X in my size, or sell rare item Y?)
Service/Brand (do I trust/like them?)
Experience (is it easy/designed to shop for X?)

Internet commerce has witnessed incredible price transparency, where the Walmart effect can play out without any pesky geographical barrier for most items that UPS will ship; this explains why there are 41,000 shoe stores offline in the US but maybe only 5 of scale online.  That leaves Selection, Service, and Experience.  Selection explains why a small site like is likely thriving, and Service shows how Zappos got to $1B in sales.

The danger is that when a niche becomes big, it will simply be invaded by Amazon, the Internet’s Walmart. I’m pretty certain that if Squash becomes the number one sport in America, Amazon will “go big” and put out of business by squeezing better prices out of suppliers and providing lower prices to consumers, combined with a world-class logistics engine.

If you’re an entrepreneur itching to get into e-commerce, remember that you can’t compete on geography (unless you’re cloning an existing retailer in a region where there is no Amazon), and you can’t compete purely on price.  But here’s what you can do:

Cultivate a better shopping experience: BlueNile is simply a better place to shop for engagement rings. Zappos is a better place to shop for shoes. In some cases, what makes great (every shopping experience is the same) is also its greatest weakness.  Some things are designed to be bought differently.

De-Commoditize: If you’re just another reseller of a generic commodity, you better have a pretty clear advantage outside of price…but these are often tough to come by. is one of very few companies that has out-Amazoned Amazon. If there’s something unique you can add to the order (e.g., proprietary software that consumers can use with the commodity good) it makes it easier to differentiate and provide value to the consumer in excess of a nominally higher price. For example, a vitamin reseller might be wise to develop a smartphone app to remind consumers of pill times…and bundle it with every order.

Build a marketplace for buyers and sellers, don’t be a reseller. Etsy, eBay, IronPlanet, Copart, Elance and others have built great value by focusing on the defensible art of the network effect.  This area is far from played out, and there are many marketplaces waiting to be created for verticals from babysitting to piano lessons. The best marketplaces tend to be for frequently purchased items with a diverse quantity of sellers and few repeated interactions.  For example, you want to eat at different restaurants, but typically go to the same piano teacher for years, so it’s easy to see why OpenTable might be bigger than a piano lesson marketplace.

Distributed commerce: Who can beat Amazon on price? The companies whose products are sold on Amazon!  Outside of the Kindle, Amazon is merely a reseller — marking up the price of others’ products, so those “others” could theoretically beat Amazon in selling direct to consumer.  But most manufacturing companies do not do a very good job selling products direct to consumer, and hate to risk channel conflict.  And consumers prefer to shop at supermarkets, not “silo” markets.  Imagine a world of decentralized commerce — where you can shop at any number of manufacturers within the context of one meta-shopping cart or wallet.  It might be a pipe-dream, but it’s a huge opportunity that could beat Amazon on price and selection if the experience and service components could be filled in.

Preempting Search

Google: 65.8%
Yahoo: 17.1%
Microsoft: 11%
Ask: 3.8%
AOL: 2.3%
(Search Engine Market Share, source: Comscore, August 2010)

Outside of a tectonic shift in search results/quality – think how offering 100x more email storage encouraged people to switch webmail companies back in 2004 — people are not going to ditch Google as their primary search engine. And Google isn’t taking any chances – by paying Dell $1B for their search toolbar to be pre-installed on new Dell PCs, or pushing Android (who’s the default search engine?), they are doing their part to make current habits continue and lock down their whole “supply chain.”

For Google’s enemies, the best way of hurting the search goliath is not to build a better search engine, but rather to give people a reason to stop searching for a wide class of goods and services by preempting search on Google. Given Google’s dependence on harvesting “transactional intent” for its revenue, the key is to move transaction initiation off of Google. The ComScore search marketshare numbers at the top are somewhat meaningless; Google could lose massive revenue while their overall search share, for non-transactional search, stays strong or even grows.

What can preempt Google search — or at least the money-making parts of it? There are two things for Google to worry about: Vertical Search and Intent Generation. Vertical Search will nip away at vulnerable parts of Google in the same way that Etsy, Copart or IronPlanet has nipped eBay – think OpenTable for restaurants, Kayak for travel, Amazon (yes, Amazon) for traditional e-commerce, etc. And Intent Generation catches people further up the funnel, before they search, and delivers them what they want, and gets them to purchase, before they start searching. Intent generation can also spawn impulse purchases and overcome inertia to get people to buy more quickly.

Intent Generation is perhaps the more dangerous, because it is stealing purchases from Google’s clutches – bypassing any kind of search.

Vertical Search

Amazon: if everyone in the world signs up for Amazon Prime (unlimited, free 2-day shipping) and becomes a loyal Amazon customer, who would search for anything shopping-related on Google? We’re a long way from this happening, but imagine Amazon as the “e-commerce search engine” and Google as the “random stuff I’m looking for when not buying” search engine. I believe the long-tail of ecommerce resellers will deteriorate due to economies of scale and lack of geographical differentiation (e.g., 40,000 offline shoe stores, but only 5 of scale online), thereby making Google less relevant for a whole category of searches, and benefiting Amazon as the largest, broadest ecommerce company.

ZocDoc, OpenTable, and Yelp: Since becoming an OpenTable convert and Yelp user, I have not searched once for a restaurant on Google, and I bet these two companies are quickly taking away searches from Google for the dining category. I’m a big believer in ZocDoc, and if that can become the Expedia of medicine (long way to go for that to happen), Google could lose another category.

Kayak and Expedia: Expedia is a great example of what Google needs to avoid. If you’re looking for a hotel in Phoenix, you probably head straight to Expedia, Kayak, or another online travel agency (OTA). Google doesn’t have much to lose here because it’s never had a foothold in travel search, but its purchase of ITA is very strategic as a way of reversing that.

Intent Generation and Catalysis

Groupon: for “impulse” purchases, things like Groupon are pushing offers to consumers rather than relying on consumers to pull (search). The half-million or so Gap Groupons sold on 8/19/2010 represent half a million customers who won’t be searching for Gap, much less any other clothing retailer, on 8/20/2010. Groupon snatched these customers (and their discretionary clothing spend) before they got a chance to search. Some of this is accretive and not preemptive, but consumers only have finite income and a million Groupons every day will have a substantial impact on Google.

Facebook: With more traffic than Google, Facebook only has an estimated 5% of the revenue of its rival. Social recommendations, a catalyst for Groupon’s success, can help preempt search, but these tend to further curate intent rather than harvest it, as Google does. The holy grail is the ability to show the perfect advertisement at the perfect time (precognition, like in Minority Report), something Facebook has a better chance of doing than anyone. The popularity of gaming on Facebook is another angle we have seen be effective – encouraging people to buy something (e.g., a new sweater at Gap) in order to get credits in a game. This is both an example of intent generation and intent catalysis; perhaps you knew you were going to buy a sweater eventually, but you decide to buy it today, and buy it from Gap and not Macy’s, in order to deck out your virtual restaurant on Restaurant City.

Payment Companies: By knowing how much you spend and where, payment companies have tremendous opportunity to change future behavior, generating and catalyzing intent. American Express recently sent me a very nice coupon/gift certificate for Barneys. A month later, when I thought about going shopping, I went straight to Barneys, and didn’t search elsewhere. It preempted my search and changed my behavior. Unlike Groupon, which offers great deals to everyone, payment companies have nonpareil data to use in targeting offers to consumers, and furthermore allowing merchants to target specific consumers. PayPal, American Express, or a resurgent Google Checkout could fundamentally change the nature of ecommerce through intent generation in the same way that Catalina Marketing has altered the CPG and supermarket industries.

With Bing, Microsoft has made a laudable attempt to out-Google Google, but Google has thousands of engineers who can quickly out-Bing Bing. The battle for search is over for now — Google won — but the battle for the underlying revenue is just heating up.

Why Online to Offline Commerce is a Trillion Dollar Opportunity

(Originally a guest post for TechCrunch)

What do Groupon,, OpenTable, and SpaFinder all have in common?

They are all enablers of online to offline commerce.

Groupon’s growth has been nothing short of extraordinary, but it’s merely a small subset of a growing category which I’d like to call Online to Offline (O2O) Commerce, in the vein of other commerce terms like B2C, B2B, C2C, etc. O2O is more of an adverb that modifies those business classifications: it’s a combination of payment model and traffic generator for merchants (and a “discovery” mechanism for consumers) that changes and creates offline purchases and is inherently measurable, since every transaction (or reservation, for things like OpenTable) happens online. This is distinctively different from the directory model (think: Yelp, CitySearch, etc) in that the addition of payment helps quantify performance and close the loop – more on that later.

In retrospect, the fact that this is “big,” or that Groupon has been able to grow high-margin revenues faster than almost any other company in the history of the internet, seems pretty obvious. Your average ecommerce shopper spends about $1000 per year. Let’s say your average American earns ~$40,000 per year. What happens to the other $39,000? (The delta is higher when you consider that ecommerce shoppers are higher-income Americans than most, but the point is the same).

Answer: most of it (disposable income after taxes) is spent locally. You spend money at coffee shops, bars, gyms, restaurants, gas stations, plumbers, dry-cleaners, hair salons, etc. Excluding travel, online B2C commerce is largely stuff that you order online and gets shipped to you in a box. It’s boring, although the ecommerce industry has figured out an increasing number of items to sell online (witness Zappos’s success with shoes: $0->$1B in 10 years, or BlueNile’s with jewelry). FedEx can’t deliver social experiences like restaurants, bars, Yoga, sailing, tennis lessons, or pole dancing, but Groupon does. Moreover, your locally owned and operated Yoga studio has little marginal cost to add customers to a partially filled class, meaning that the business model of reselling “local” (especially local services) is often more lucrative than the traditional ecommerce model of buying commodity inventory low, selling it higher, and keeping the difference while managing perishable or depreciating inventory.

The important thing about companies like or Groupon is that performance is readily quantifiable, which is one of the tenets of O2O Commerce. Traditional ecommerce tracks conversion using things like cookies and pixels. Zappos can determine their ROI for online spend because every completed order has “tracking code” on the confirmation page. Offline commerce doesn’t have this luxury; the bouncer at the bar isn’t examining your iPhone’s browsing history. But O2O makes this easy; because the transaction happens online, the same tools are now available to the offline world, and the whole thing is brokered via intermediaries like This has proven to be a far more profitable and scalable model than selling advertising to local establishments; it’s entirely due to the collection of payment by the online intermediary.

Does Groupon deserve a 10 figure valuation? It’s easy to see a world where O2O Commerce dwarfs traditional (stuff in a box) e-commerce – simply because offline commerce itself dwarfs online commerce, and O2O is simply shifting the discovery and payment online. If Groupon can grow its leadership position, I predict an 11 figure valuation based on discounted cash flow alone. Groupon is not a gimmick or a game, but a successful example of offline commerce being driven by an online storefront and transaction engine.

Venture Capitalists and Entrepreneurs would be wise to think beyond cloning the “deal of the day” concept – and instead think about how the discovery, payment, and performance measurement of offline commerce can move online. This will have ripple effects across the whole Internet industry — advertising, payments, and commerce — as trillions of dollars in local consumer spending have an increasingly online genesis.