E-Commerce on Trad Retail

In the competition for getting on the e-commerce's train, it is no easy feat for every traditional brick and mortar stores to have a winning formula to replicate the success such as Amazon and Netflix. Notwithstanding the difficulty of hardware installation or setting up the websites, online businesses still have quite a number of challenges. First of all, not  all type of businesses are suitable for online e-commerce. Groceries and liquor stores may find it difficult to have online website and have groceries delivered to the customers without the scale and IT specialty. 

However, the biggest problem is to replicate brick value propositions in the online world. Conversion rate, which is defined as purchases divided by store visits, are the essence of sales success. For instance, Walmart’s online conversion is still a mere 8%, which means that over 90% of the online visitors visit their website without making any purchases. Traditional retailers need to understand the user experience and the dynamics of online user interactions and reflect that understanding in the design of their e-commerce services. To many consumers and for many transactions, online store has a particular advantage in pricing and convenience, as they can shop at whatever hour they want and comparing websites with several different websites. On the other hand, customer service which involves real person answering, can be hard to be provided online 24/7. And some customers might prefer to hold the products in their hands before buying them. Therefore, retailers must be able to integrate their offline and online channels so that they can satisfy their customers. 

Online group buying sites were among the most popular websites in 2011 beside the social network websites. They offer daily deals to consumers that feature deep discounted gift certificates usable at local restaurants, beauty salons, massage centres, bakeries, and many more businesses. The industry was deemed as the fastest-growing industry last year. The business model works particularly well during recession where consumers constantly look for cheaper deals online. And the biggest of the industry, Groupon, went public last year with a staggering valuation of $14 billion, while they were still making a loss for the fiscal year. From the day one, the business model has been taking a lot of hits, with investors doubting its sustainability and real benefits brought to businesses which advertised on the websites. 

In an industry where the entry barrier is almost to none and has low switching costs. Groupon customers can always easily switch to its competitor, Living Social, if they were to offer better deals than Groupon. Hence, the advertising cost and customer acquisition costs in this industry is surprisingly high, such that in 2010, Groupon’s marketing expense were almost 91% of its revenue. Although it improved slightly in 2011, marketing cost represent a huge concern for daily deal providers. Living Social, which Amazon owned 31% of the company, reported a loss of $558 million from $245 million revenue in 2011. 

To make the matters worse, according to the recent survey by Yipit and Susquehanna Financial Group, it found that 52% of the surveyed merchants are not planning to feature deals  in the next 6 months, as there is not evidence that customers who bought coupons would be a returning customers after spending on the coupons. However, undoubtedly, Groupon remains as a very useful and popular platforms for new businesses to advertise and to gain online traffics in their initial stages. But are they useful in the long run, I am personally not so optimistic, especially reading the HBR article. Groupon and other deals provider websites have to come up with better business model to retain customers and try to differentiate themselves. 

Sources:

The future of Groupon’s business model, http://blogs.reuters.com/felix-salmon/2011/08/27/the-future-of-groupons-business-model/

The Problem with Groupon's Business Model, http://blogs.hbr.org/hbr/mcgrath/2011/07/the-problem-with-groupons-busi.html

How Sustainable Is Groupon's Business Model?, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2784

Groupon: Restated Numbers Reveal Failure of Business, http://www.sequenceinc.com/fraudfiles/2011/09/groupon-restated-numbers-reveal-failure-of-business/

LivingSocial Lost $558 Million In 2011, http://articles.businessinsider.com/2012-02-01/tech/31011853_1_livingsocial-groupon-amazon

The Chart That Will Scare Away Many Groupon Investors, http://blog.yipit.com/2011/10/21/the-chart-that-will-scare-away-many-groupon-investors/

Groupon shares drop on concern about merchants, http://www.reuters.com/article/2012/01/03/us-groupon-merchants-idUSTRE80210020120103