Building excellence in ecommerce

I'm long on vertical ecommerce and have had the pleasure of investing in and managing a number of businesses in the space. I hold and still make a number of investments there and following my earlier piece on Web 3.0 I reflect on the challenges those businesses face.

What would Web 3.0 mean for established ecommerce businesses?

The levelling of information brought by the semantic web will power both new entrants and Internet giants to consume and redistribute information from vertical ecommerce sites. It is no coincidence that the platform giants have built marketplace, checkout/payment and product modelling systems. In particular, Amazon and Google will process payments, host servers, enable product resale through their marketplaces, and even -- in Amazon's case -- manage fulfilment for smaller vendors. Google and Facebook have even built OAuth login systems which can be used by site owners to let their users log in.

At the moment, these tools are largely opt-in. Ecommerce sites choose to list their products and pricing by supplying a special feed of data. With a semantic site, the ecommerce players won't need to maintain this feed: the aggregators, price comparison sites and platform giants will just be able to take it. Giving up this initial direct contact with potential customers by using a marketplace is the beginning of the end for larger ecommerce businesses. Just as ruthlessly as the supermarkets pushed their way up the value chain to destroy wholesalers and then squeeze producers in the UK in the 80s, and as vertical ecommerce sites squeezed wholesalers in the earlier 00s, the platform giants will rapidly marginalise ecommerce companies once they start exposing rich data. How?

The squeeze starts

Firstly, marketplace providers gain access to a set of particularly valuable information: they learn all sorts of things about which products sell well, at what price, to whom and when. As an example, Amazon were effectively given free data on the reach and margin two verticals and were able to swoop in to buy Zappos and undercut diapers.com until they reached a deal to buy the business. The change here is that the platform these ecommerce site operators build on is no longer the cables and servers version of the Internet of old, it's increasingly a serviced-based platform. This platform is cheaper, faster to scale, works better... and will compete with the same people who are building their sites on it. All of the big three, Amazon, Google and Facebook have a compelling offer for etailers: providing traffic and conversion opportunities in exchange for commercial, product and stock data.

The second and most significant challenge is the lack of control that site operators have over marketplaces. The marketplace sets the rules. Companies selling apps for iPhones complain about the difficulty of selling without being featured, and about Apple's 30%, but there's little they can do about it. The ecommerce marketplaces play out in a similar way. Companies using the marketplace must compete by different rules. Vendors selling commodity products will be shown to potential customers based on how well they integrate with the marketplace, how cheaply they price, and the sort of reviews they get. Existing differentiation on pure service, brand, delivery, descriptive data or imagery become some of many things to compete on. Ultimately, marketplace vendors will get penalised for not using platform-provided payment or fulfilment options, much as eBay do with PayPal.

How might vertical ecommerce businesses avoid this fate?

Unprepared retailers will do what suits consumers least, and not expose their data in semantic or easily parseable formats. Only a relatively small number of companies are willing to share their data: content companies such as Yelp or Zagat (bought by Google) who want their scores embedded in Google's search results using microformats, or newer market entrants trying to dislodge larger ecommerce businesses.

These businesses can head off the risk of being side-lined in a marketplace by giving users a reason to visit their site other than transacting. Transaction online is rapidly becoming a commoditised service with the likes of PayPal, Google Checkout, Amazon Payments, Stripe, and Square. The days of different players having their own or wanting to have their own transaction systems are limited. Instead, investment in systems which are harder for content players to replicate is worthwhile: retailers creating differentiating non-retail value! These fall into five categories outside of the usual sorts of things which ecommerce companies will be doing, such as providing great service and engaging closely with their customers.

Five techniques for building and maintaining a strong ecommerce business

These mechanisms help ecommerce companies stay high in the value chain, so that they can avoid being reduced to price/integration competition on a platform site’s marketplace.

1. Invest in strong, unique product description, preview and imaging. Making the site’s inventory richer and sexier than it is on similar sites can be critical for keeping traffic and boosting showrooming. It is still relatively easy for smaller sites to do a better job of showing products than Amazon does. Relying on manufacturer or brand-supplied SKUs and descriptions is harmful in that it makes price comparison easier, and any generic content translations can be easily harvested by competitors.
2. Generate stickiness on-site with buying, planning and complementary tools. Similarity, loyalty systems and elements of community give users a reason to remain on site or to return and potentially be converted later. Amazon has done well with Prime and nimbler, smaller companies can do a lot.
3. Source own-brand & product personalisation options. With own-brand product retailers have the opportunity to create exclusive products and deals. Often similar to conventional branded products and originating from the same factories, they can provide tie-in and help the retailer retain control. Similarity, online product customisation systems are great for margin and cater for interest in makers and custom goods. Amazon have been quietly building a large inventory of products under their own brands, and even repackaging branded goods.
4. Entrench with added value and alternate revenue streams. By offering price aggregation, comparison or marketplaces (both new for other retailers & second-hand for consumers), ecommerce players can to position themselves as top of their vertical. After Play.com’s strength in entertainment media was destroyed by a tax change, the owners managed to sell the business on the strength of its marketplace, which held up well in relative terms.
5. Offer brand extension options to suppliers. Just as supermarkets sell aisle placement and banners, sites such as KitBag and CNET are masters of offering co-branding, endorsement, and customisation options to secure brand support in cash, margin, stock and supply exclusivity. Amazon are already adopting or countering many of these tactics head-on: they’re using partner sales data to expand their range of own/alt-brand “basics”, and will offer non-niche brands a better deal direct through their own platform, packaging, logistics and promotion.