Commerce, Offline

Why Online to Offline Commerce is a Trillion Dollar Opportunity

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(Originally a guest post for TechCrunch)

What do Groupon, Restaurant.com, 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 Restaurant.com 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 Restaurant.com. 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.

Advertising

The Rise of Transactional Advertising

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The marriage of brand advertising and free content is facing peremptory annulment. There is no shortage of punditry around “the death of the media company” and whether it is a just dessert or a societal travesty. But that’s looking at it from the media company and consumer viewpoint – what do advertisers think about all of this? Where is online advertising headed and what does that mean for free content?

Making content free was not a well thought out business model. Rather, before the days of Sirius XM and DirecTV, there was no more of a way to charge for freely accessible radio waves than there was to charge for air or sunshine. Making content free, and charging for advertising interspersed in that free content, was pretty much the ONLY business model back then.

And it worked pretty well, because supply (advertising “units”) was limited by the amount of content produced and, more importantly, by the narrow “channels” where such content was made available. With such low supply, high demand, and massive reach, it was easy to reach large swaths of the populace. The advertisers couldn’t really quantify their results, but they came up with a wide variety of methods to attempt to do so. Market research firms such as ACNielsen flourished to fill the need for “metrics.”

But, as I argued in my last piece, brand advertising doesn’t really work – or, perhaps better put, is superseded by “transactional advertising.”

The old logic went like this — people were more likely to buy Coca-Cola versus Carbonated Dark-Colored Sugar Water X because Coca-Cola had a brand (which Coca-Cola has spent billions on). What’s the value of Coca-Cola’s brand? Pure math – it’s the Net Present Value (NPV) of the difference that consumers will pay for Coca-Cola versus, say, RC Cola, for the lifetime of the consumer and duration of the brand. When you pay $1 for a Coke versus $.50 for an RC Cola, the $.50 difference is chalked up to the “brand.” (Yes, perhaps there are differences in taste, too – but even with an identical formula and taste, I would argue RC Cola wouldn’t sell as well as Coke). Multiply $.50 times billions upon billions of cans of Coke, and you see the power of brand.

I don’t disagree with this notion, but I would argue that it is becoming largely irrelevant for a large class of goods and service providers (think soda or television set, not Rolex or BMW), and that the “brand” advertising money can be better spent, thereby imperiling expensively produced, freely distributed content. To wit: what if Walmart refused to stock Coca-Cola, instead stocking just RC Cola? Granted, Walmart stocks Coca-Cola because consumers demand it, and consumers demand it because of the brand that Coca-Cola has created, but that can easily be reversed. If Walmart decided to stock only RC Cola and expel Coca-Cola from its shelves, this would change RC Cola’s fortunes, and harm Coca-Cola, quite a bit.

Preferential placement of a good or service at/near the point of a transaction is something I call “transactional advertising,” which I predict will expand as a category in the coming years. Transactional advertising describes a clear food chain of brand and positioning; the titans at the top are Google, Amazon, Walmart, and other “aggregators” who themselves hold considerable brand equity and/or organic traffic. Smaller players exist in niche fields: BankRate, Shopping.com, Edmunds.com, Lending Tree, even Diapers.com have become destinations that steer consumer decisions. These have potential to be the new “media” companies in a transactional advertising universe, odd as that might sound.

This form of transactional advertising exists today, although you might not know it. Proctor & Gamble spends great effort and expense (though it pales in comparison to their brand advertising spend) to ensure eye-level placement wherever its products are sold. Many retailers “charge” for shelf-space, with the clear understanding that better merchandised goods have a better chance of ending up in consumers’ shopping carts.

Today you see very little in the way of transactional advertising online; rarely does one brand pop up in another brand’s checkout experience. There’s a good chance that will change in a major way in the near future. If old media companies can figure out how to attach themselves to more transactions, they have a fighting chance of sticking it out online.