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Why Social Commerce Will Be Different than E-Commerce

2011 August 17

While the rest of the economy is sputtering, social commerce is booming.  Sites like GroupOn and livingsocial are taking the world by storm.

On the surface, it looks like the early days of the Web, when sites selling everything from groceries to pet food were sprouting up everywhere.

Most failed, but Amazon boomed.  It was a “winner take all” game.  So it would be logical to assume that social commerce will go the same way.  A wide and vibrant field, an all out race and then one man left standing.

However, look beneath the surface and it becomes clear that it will most likely be very different this time.  We are much more likely to see a situation similar to online media; a variety of models competing in a fragmented, vibrant market.

The Horse Race

Imagine a horse race, where all the horses run through stalls to start the race.  Now imagine hundreds of those stalls, but instead of horses, you have data running through them.  Each stall represents a different data category, such as age, sex, level of discount or whatever.

That’s the essence of adaptive targeting.  If you have lots of data running through, your algorithms can adjust very quickly to changes in the marketplace (one reason why Google is the best search engine is because it’s the biggest).

This is a very good way to run your back-end if you are a media company.  You’re not worried much about targeting your content to individuals, there are too many constraints over what you can publish at any given time.  You are, however, very concerned about the aggregate and what they will respond to at any point in time.

The Jigsaw Puzzle

An alternative to the horse race approach is the jigsaw puzzle.  You find a piece, put it in its proper place, and you’re one step closer to the full picture.  As you get more pieces and the consumer portrait comes into focus, your algorithm becomes strong enough to design individualized offers.

Notice that this is almost diametrically opposed to the mass adaptive targeting method. You’re not so much concerned with general trends, but focused on a particular identity. It’s much more Saville Row than it is J.C. Penney.

However, unlike Saville Row, customization comes at mass market prices.  This makes the jigsaw method an extraordinarily powerful business model.

The disadvantage, of course, is speed.  People come to your site anonymously and your ability to service them is low.  Much like in an old village hardware store, you must establish a relationship with your customers over time.

How Amazon Rules The World

Amazon, of course, has become a powerhouse in large part by using the jigsaw puzzle approach.  They track where you go and what you buy on site.  They then use this information to offer recommendations, which you can improve yourself by giving Amazon more information.  And why not?  Everybody wants better recommendations.

In other words, the jigsaw puzzle enables Amazon to co-create user experience with their consumers.  The site which users see is, in many respects, their own.  Amazon simply provides the tools for them to build it.

Another interesting aspect of the Amazon model is that it is vendor neutral.  You can buy things from just about anybody, even other consumers. In a very real sense, Amazon isn’t selling books or electronics or any other tangible good.  They are providing an interface, logistics and a recommendation engine based on information users give them for free.

It’s a powerful business model, with an enormous advantage and a crucial flaw.  It takes years of time and millions of visits to develop a meaningful picture of enough individual consumers to create value on a mass scale.  However, if you can do it, you’ve created a sustainable competitive advantage.

What To Expect From Social Commerce

One of the interesting things about social commerce sites like GroupOn and livingsocial is that they are developing horse race algorithms much like a media company would.  With the frenzied pace of their business environment, that makes a lot of sense.  Adaptive algorithms are faster and easier to implement.

However, it also means that it is unlikely that there will ever be a dominant player. Rather, we should expect to see a fragmented marketplace, with pure players, social media sites like Facebook and twitter, as well as more traditional media outlets all competing for vendors with wares to sell.

The social commerce model is still in it’s infancy and it’s still early days.  Moreover, business models and the algorithms that drive them tend to evolve over time.  Google for instance, has migrated over the years  from a horse race to a more jigsaw oriented approach.  So the jury is still out.

One thing is for sure though, social commerce is here to stay and promises to be an exciting space in the coming years.

– Greg

2 Responses leave one →
  1. August 18, 2011

    Just wanted to make a small comment about Grupon …take a look at this article.

  2. August 18, 2011

    Thx. It’s a very good point. These companies are running very fast and it’s still not a given that they will survive (in fact, some will surely fail). However, I think it’s clear that the social commerce model will be a growing force whether as stand alone businesses part of an integrated media sales effort. Most likely, we’ll see both.

    – Greg

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