The Future of Shopping – Can small guys win?

May 31, 2012 Comments Off by

Is the future of online shopping going to be dominated by a handful of monolithic global online giants? Is price the only differentiator? What future is there for the businesses that are not ‘the cheapest’?

If you want PayPal’s views on the future of shopping, then this report from PayPal will be interesting for you.  Elena Wise, Director of Merchant Services for PayPal Australia made this comment in the report summary:

“As Australians continue to show a preference to buy from local retailers, with domestic retail accounting for the majority (70 percent) of online spending in Australia, we expect to see big things from Australian retailers this year as they begin to fully embrace online commerce. In many cases, retailers in Australia are at the early stages of their online journey, presenting a huge opportunity to learn from international counterparts by amalgamating best practices.”

Yep, Elena is right. Many retailers in Australia are at the early stages of their journey, but with 70% of online spending happening domestically, some retailers are doing it well.  Australian businesses like the online shoe shop StyleTread are basing their online operations on US best practices from current market leader and Amazon subsidiary, Zappos.

We can learn a lot from the successes of others, but usually not from blindly copying them. Just copying what you see a successful business doing today will put you behind them unless your roadmap for the future is smarter than theirs.

I’ve written before how less than 16% of Australian SME businesses have a digital strategy. This is a big part of the problem, but from my own experience, many businesses who think they do have digital strategies are operating with fundamental and probably fatal flaws that fight or ignore the big picture trends.

It’s not enough for a retailer to ‘go online’ and set up a website for their business.  Unless the website is a part of business strategies that make sense for that business, chances are the website by itself will not work so well to make or restore the fortunes of its owners. Worse, it may be a flop. And flops are very expensive.

Some Aussie businesses have tried selling online but have largely wasted their time and money by sticking their toe in the water and deciding it is all too hard. Some have simply got bad advice from technical people who are more interested in selling websites than real business solutions.  Others have suffered from the ‘arrogance of success’ and have thought they did not need to evolve past their bricks and mortar.  Some have been caught up in the legacy traps of their existing retail operations and found themselves unable to change quickly.  And others have ignored online for the past 15 years, hoping it will go away. It didn’t go away – and it won’t go away.

Elena Wise also makes the point that these same retailers now have a huge opportunity to learn best practices of others. Understanding what works and what doesn’t work for others is important, but having your own smart roadmap for your business is critical if you want to actively create the future you want for your business and your customers.

You have different resources and capabilities to other businesses, and commercial reality normally says you have to develop your own opportunities within the constraints of your own situation.

Niches & Communities

Implementing the best practices of others can be a huge challenge. According to the report, Amazon spent US$1.7bn on Technology & content costs for the year ending 31 December 2010. Global scale has helped Amazon develop some great global business practices, but in my view, their Achilles Heel is their very size coupled with their lack of focus.

Amazon’s niche is really unclear these days. 

Trying to be everything to everybody is hardly a replicatable recipe for success. Amazon may be the world’s largest online supermarket, but how does a small business compete?

Start by picking out your niche and really understanding the wants and needs of the customers in your niche.  (It’s so basic that most people miss it.)  You can advertise to these potential customers, in a variety of ways, but it’s often smarter to find where these people go online.

Find the online communities they belong to – and go join these communities yourself.  Understand the issues facing these people and provide solutions to them.  Answer questions and be encouraging and helpful with your advice.

Don’t promote your business overtly but contribute to the discussions. Become trusted. In time, you can become the trusted advisor to this community, and you will find the community will become your marketplace.

Smaller businesses can compete with Amazon. For smaller businesses, the rewards will go to those who understand their niche and become locally famous and perhaps world famous in servicing that niche.

The Importance of Scale

Even a small business online will find that growing bigger has benefits from increased economies and efficiencies of scale. Obviously growth can also bring growing pains and expenses, so finding the  right size for your operations can be a challenge.

The PayPal report includes a paper from JP Morgan called “Retail Sector, Online Retailing – Momentum Built in 2011, Issues to Consider for 2012″.  It highlights Competitive Threats posed by Technology and the Web.

  • Threat #1: Increased price transparency
  • Threat #2: Retailers not innovating online will lose market share
  • Threat #3: Vertical integration
  • Threat #4: Foreign competition

It also includes this productivity loop diagram.

As the JP Morgan paper authors Shaun Cousins and Shen Li explain, ‘an online retailer with scale has the capacity to invest in technological innovation to drive sales. As sales increase, fixed costs are fractionalised and per unit innovation costs decrease. As operating leverage increase, prices charged to customers decrease, which drives sales and therefore more scale. This provides the company with a greater ability to innovate online which drives sales further.’ And this continues driving the productivity loop.

Shaun Cousins and Shen Li also make the point that retailers who do not focus on building scale within their online businesses will be at a disadvantage. Clearly this will be true for most, however scale comes in different forms for different levels of retail operators.

Great Customer Service is One to One

Getting scale in purchasing, technology, ordering systems and in fulfillment and logistics is important, but in my view the real winners will be those that provide great customer service and support – not just when everything goes smoothly but to fix things that go wrong.

And that’s where small business can win. The provision of great personalized customer service does not scale as well as many other parts of the business.

Sure, there are online chat systems, video FAQs, global call centers and other tools. These can help, but for the moment at least, providing great customer service requires a one to one person-to-person interaction, and it’s pretty hard to to automate.  It is easy enough to train customer service people and give them the great systems to work with – and empower them to make the best decisions in the interests of the customer as well as the business itself.

  • Scale in providing great customer service can come from the sales and support systems used to make sure most transactions are consistently great.
  • Scale in providing great customer service will NOT come from automating the critical interactions with customers when something has gone wrong. 

There are lots of evolutionary and revolutionary stages to unfold in the future for digital age shopping, but here’s something to keep in mind…  The discount-focused race-to-the-bottom by many of the price-reducing online retailers will not allow much margin for great customer service.

How can a small business compete? By becoming remarkable for being one of the most trusted suppliers in a growing niche and delivering value-for-money products and services, keeping its promises and providing great customer service experiences in every ‘moment of truth’ interaction with customers.

That’s the future of shopping. At least I hope so.

You can read the PDF report Secure Insight: The Future of Shopping report from PayPal here.    (And thanks to Henriette Martel, CEO of Prime Coffee for sending it through to me.)

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