I’ve found the recent trend of online retailers opening up offline retail stores very intriguing, given that in the past few years, there has been a lot buzz around ecommerce and about how online stores were going to reduce and eventually obliterate the need for brick & mortar stores.

In a bid to not be left behind, big box retailers such as Macys, Walmart and Target had made a significant investment in increasing their ecommerce presence and capabilities. However, just recently, it was announced that Amazon, the world’s biggest ecommerce retailer had opened up an Amazon brick & mortar store. Some other players that started online have also expanded into offline stores such as Warby Parker, BirchBox, BaubleBar in recent years.

This to me shows that there is no one simple answer to the question of online vs. offline stores. The question should thus be: should a business be an online only store or be an offline only store or be in both retail channels. And if the plan is to be an omni-channel retailer, should the business start online and then expand to offline or start offline and then expand to online? And are there specific product categories that each of these strategies works better for?

To answer this question, I analyzed the pros and cons of having an ecommerce only company. The major benefit of starting a business online first vs. offline is the low upfront cost associated with building an online store. Websites like shopify and squarespace make it easy and cheap to start selling items online. This gives one an opportunity to prove the concept and to prove the demand for the product before investing significantly in it. Online stores also provide a broader reach and more national or global exposure than offline stores given that anyone can access the website from anywhere in the world and potentially make purchases from it. Being able to carry a diverse and unlimited inventory of products is also a benefit of an online store as there are no physical space limitations. On the negative side, online stores tend to have high logistics costs and a high return %.

There are also a lot of benefits to shopping offline, which is why approximately ninety-two percent of all purchases in the U.S still happen offline. The benefits include being an avenue for people to touch, feel, and try the product before purchasing, having a personalized in-store experience such as great customer service which can lead to brand loyalty, legitimizing the business for those who don’t know or are not yet trusting of the company, building the brand look and feel through the physical design and experience in the store. A physical store in a great location also serves as a form of marketing, because it will attract new customers to the store. These benefits all translate to an increase in repeat customers, a lower rate of returns, and potentially more sales as its easier for someone to buy multiple items when they see them in person than online. The cons of this approach are the pro of online stores such the high startup and overhead costs, the limited reach of customers, limited physical space etc.

In addition to the aforementioned benefits of both models, other benefits to the hybrid model of retail includes providing an avenue for one to buy online and to return to the store, where they can in turn find something else that suits them, thus ensuring the sale is completed. From a logistical standpoint as well, being able to fulfill orders from the store closest to the consumer as well leads to reduce shipping costs and shortened delivery times, both of which are of value to the consumer.

Some product categories such as beauty products, home and office make more sense to start online because for beauty products, online allows one prove out the concept and demand for the products first, and home and office will result in high rental costs initially so starting online is a way of getting maximum value at a lower overhead cost. However, most other categories such as fashion, electronics, mobile, games, tablets, computer, collectibles can be profitable if started online, offline or if a hybrid model is employed. I think it comes down to the personal preferences of the entrepreneur, the amount of funding secured, how quickly they are looking to build a brand presence and to grow, how sure they are of the demand for their products, how important the in-person experience is for the brand and what it represents and finally what kind of store do they the capabilities to build and manage as the needs for the two types of stores are very different.

By: Oare Avbuluimen

 


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I will confess: I am a reluctant believer in the emergent hegemonic power of e-tailing, let that be on my laptop, tablet or mobile.

The belief that e-tailing is reshaping the paradigm once defined by brick-and-mortar institutions is well founded. The belief comes from the facts and numbers out there in the economy.

My reluctance in accepting the end of brick and-mortar is, however, equally grounded in the reality evolving around us. I don’t think the real (as opposed to virtual) store experience will disappear into oblivion. I do believe, however, that the democratization of technology has reshaped how we shop at the physical store in a symbiotic way.

The facts: online retailing, the importance of mobile, …

A recent study of 61 retailers reported an average growth rate of 28% for online revenues between 2010 and 2011. These results were driven by an increased number of consumers choosing to shop online and already existing online customers spending a larger share of their wallet. If we hone into a more specific example, we can look at Urban Outfitters. Its chief information and logistics officer, Calvin Hollinger, recently said in a presentation that one fourth of their total $3 billion revenue comes from direct e-commerce sales. During that same presentation, Hollinger admitted that, “one of the challenges confronting us, is managing growth of that channel”. In the apparel industry, the successful newcomers in the last 15 years have been companies re-inventing the retail business model and operating solely online. A notable success is that of Natalie Massanet, founder of luxury e-tailer Net-A-Porter.com, who sold her business to Richemont group for $350 million. A more recent example is Gilt Groupe, the flash sale site that is expected to reach $1 billion revenues by the end of 2012.

However, online retailing per se is not the main disrupting force in retailing. During a Wharton retail conference panel titled “E-Commerce: Is It the Future of Retail?”, mobile recurrently came up as the new promise. In a recent market study surveying how important different channels were expected to be in 8 years versus today, mobile was the only one expected to increase in importance. The importance of mobile is heightened by the fact that there is such a clear untapped opportunity. As bandwidth expands and smartphone penetration increases, so will the potential of mobile. With the improvement of networks, customer targeting will get increasingly refined on the basis of where customers are, live and shop. Retailers will be able to communicate real time with these same consumers.

…And the emergence of multichannel retailing.

Yet mobile cannot operate on its own ecosystem. Welcome to the age of multichannel retail thinking. The concept allows consumers to transact with a business via an array of interconnected channels. The channels can include retail, online, mobile, and mobile app stores, among others. The share of revenues coming from online sales is increasing and e-tailers keep on coming up with new apps that allow you to complete a transaction on your mobile. I can see why the discourse has skewed towards the increasing importance of online and mobile retailing. For example, in its continuous attempt to become the biggest store in the world, Amazon’s new app allows you to snap a picture of something with your smartphone and purchase it online in 3 sweet short clicks.

Paradigm shift: from multichannel to 360 consumer-centric touch point approach.

However, customers don’t really interact with companies from a channel perspective. It is not about making a mutually exclusive choice of a channel to browse and purchase. As consumers, we expect different things from different touch points. With retailers noticing, the offline and online world are starting to interact in a more symbiotic way.

Burberry, the British £1.8 billion company and champion of “digital-first thinking” , just opened its first flagship store designed to emulate its website. For the launch of Burberry’s new watch, The Britain, the company focused on mobile as a platform for marketing. The company has developed a fully shoppable experience featuring mobile-only content. Features include geo-location and time zone driven functions that show the user’s local time on the dial of the watch. Consumers can use their iPhones as an on-screen “try-on” facility thanks to a 3D model of the watch shown on the mobile site.

And the trend of online-offline crossing applies, in an even more significant way, to younger start-ups that began as an online-only platform. Warby Parker, the eyewear maker that started as an e-tailer, recently opened a showroom in New York and converted a school bus as a pop-up store. London-based men’s lifestyle brand Hentsch Man followed a similar path, as it started as an online platform and introduced regular pop-up stores around London after one year in business. One last example is Bonobos, the menswear company that started selling trendy pants online. Bonobos recently closed a deal with brick-and-mortar retailer Nordstrom to sell its clothes in more than 69 physical stores.

It seems online and offline retailing may not be a zero-sum game after all.

Sources

Mulpuru, Sucharita “The State of Retailing Online 2011” Forrester Research 2011

Johnston, Peter “Maintaining Cool” stores.org October 2012

Young, Don “The Gilt Groupe May Approach $1 Billion Revenues in 2012” dailydealmedia.com November 2011

“Current and Future Channels that Are and Will Be Most Important for Connecting with Customers According to Retailers in Europe, 2012& 2020” emarketer.com September 2012

“Online Retailing’s Next Frontier” Knowledge@Wharton November 2010

www.guardian.co.uk/fashion/2012/sep/12/burberry-london-shop-website

www.hentschman.com/info/about/pop-ups

Hempel, Jessi “Online Stores Are Moving To The Real World” Cnnmoney.com October 2010

 


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An under-utilized offline mobilization strategy for online companies: the external sales force.

Online companies implement a wide variety of offline mobilization strategies to raise company awareness and grow their user bases. Some of these strategies have had significant success, such as Monster.com’s first Superbowl commercial in 1999, while the success of other strategies seems quite questionable, such as the use of stickers and decals that get affixed to car bumpers and public restroom urinals proclaiming a new URL for you to visit – I don’t know about you, but driving down the highway and restrooms are not places where I typically seek out new websites.

One offline mobilization strategy that seems to be largely under-utilized by online companies is that of the external sales force:  non-affiliated, independent ‘agents’ that are typically compensated on a purely commission basis, that often set their own working hours and working styles, and who are enlisted to promote the company, sell its products, generate sales leads, refer users, etc. For example, an online company trying to attract college-aged users could enlist a few students at each target college as external agents, and incentivize them to recruit their peers to be users of the site. In some ways, these agents are the offline analog of bloggers who are paid commissions to promote or advertise a company to their reader bases.

One example of an online company using an offline external sales force is in the online deals industry. Where Groupon has a massive, high fixed-cost internal sales force to source deals, one competitor, Signpost, has established an external, commission-based sales agent network of ‘Deal Scouts’ to source deals that get featured on the Signpost.com.  Many Deal Scouts interact with local businesses in their day-to-day lives anyway, and can thus earn extra income by sourcing deals from these businesses.

What other online companies might also be well positioned to use an external sales force?  If a company can identify a population of people who already have access to the company’s desired market, these people could potentially be enlisted as external sales agents. Or, if the company has a loyal following of customers that, if given the right incentives, would happily promote the company beyond simply casually referring their friends or “Liking” the company on Facebook, these people could become more formally leveraged as external agents.

Some considerations are key in designing an external agent network: 

– First, the company needs to structure agent compensation in such a way to incentive the right behaviors; for example, agents should be incentivized to target their promotional efforts towards test highest-value potential customers, not just anyone willing to sign up as a user on the company website.

– The company should ensure that the incentive system cannot be ‘gamed’. Since agents are often geographically dispersed, with little human interaction between the company and the agent, its more tempting for agents to find ways to perversely game the system to their advantage, and to the disadvantage of either the company or its customers.

– In terms of agent compensation levels, it may be in the company’s interests during early stages to set agent commission compensation quite high, where the agent gets nearly all, or even more than, the value of the customers they bring in, if the company is willing to invest early to rapidly grow their user base; this is likely especially true in a high network effects business that is trying to quickly reach scale, where its initial customers will beget future customers. Eventually, once scale is reached, the company will need to ratchet down agent compensation so that incremental customers are acquired profitably.

– Since agents will act as the face of the company, it’s important to ensure they have skills, tools and materials needed to represent the company well. For example, the company’s business model may require fairly tech-savvy agents, if agent interaction with potential customers requires sufficient comfort with a technical online product or service. 

– Managing the external sales force can be resource drain to the company if the recruitment, on-boarding, training, troubleshooting, paying, and retaining of agents is labor-intensive. If the company expects the external sales force to grow rapidly, or remain a long-term component of growth,  it should invest up-front in automating and streamlining sales force management processes.  If built well, this infrastructure can allow the external agent network to add huge leverage to the company’s sales and promotion efforts, with minimal variable costs to scaling the sales force.  That being said, many of the best potential agents will require at least a bit of human interaction to get them to join, answer their questions, and keep them engaged over time – perhaps in the form of a welcome phone call upon sign-up, and periodic webinars for existing agents.

Online businesses should consider whether the offline, external sales agent model would help them mobilize, in additional to their other online and offline mobilization efforts.

By: Mike Sterling


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