Social networks are a girl's best friends

We continue our rotating Startupbootcamp blog series - our ten teams take turns sharing their thoughts and experiences on their Startupbootcamp adventure. This entry is by Artas Bartas, of Spockly.

E-commerce in the Recession

You might be forgiven for thinking that e-commerce business have been thriving in the gloom of the recession: while physical retailers closed shops, pruned their workforce and filed for bankruptcy protection, online retailers busied themselves attracting increasing share of shopping dollars and reporting handsome profits. In fact, Amazon’s profits grew by the average of 28% over the last three years. Yet if you talk to VCs, entrepreneurs and new media gurus, you are bound to hear another story: online shopping has been ripe for innovative departures for some time and the new crop of ambitious startups is working hard to turn the old business model on its head by adding social dimension into the mix. To get an idea of how little business innovation took place in e-commerce world, consider the following statistics compiled by Josh Kopelman: more than half of today’s most trafficked websites did not exist back in 1999.

Disruptive innovators like Facebook, YouTube, Wikipedia, MySpace or Twitter shot to global prominence in a matter of few years, all thanks to their innovative ideas and willingness to experiment with different models. Meanwhile, of the top 15 most trafficked e-commerce websites today, only one online shop – NewEgg - did not exist back in 1999. This fact just shows how loath e-tailers are to experiment with the key premises of online shopping. On the second thought, why should they? After all, the current model has produced such a steady stream of revenue over the years.

Going social with your dollars

Well, one group of companies that are not afraid to get their hands dirty experimenting are startups engaged in social commerce. These clever gals and lads saw how much time we all spend networking online and thought to themselves, why not put this fact to the benefit of online retailers? Businesses they have built on these assumptions fall into three broad categories:

Flash sales: Pioneered by the French startup Vente Privée, this business model hinges on organizing limited period, usually 2-4 days, sales of branded fashion merchandise. Sales events are opened only to registered members and until recently to become one you had to be invited by somebody who is already inside. Undoubtedly, such exclusivity, coupled with the fact that traditional fashionistas were among the first ones to jump on this bandwagon, added quite a bit of glamor to Vente Privée events. Companies: Vente Privée, Gilt Groupe, Rue La La, Haute Look, Ideeli.

Group buying: The idea is to feature daily offers from local businesses – a restaurant meal, flying lesson or hotel stay – at a steep discount (50% is expected, 90% not uncommon). The snag is that offer comes into effect only if enough people sign up, which gives potential buyers an incentive to spread the word among their friends, colleagues and relatives. Needless to say, by now the concept of group buying has became so widespread that one almost expects to read of retired grannies and laid-off carpenters starting their own deal-of-the-day websites. Companies: Groupon, Living Social, Woot, Buy with me, Tippr.

Social graph: Then there is a big group of new startups with funny names that attempt to leverage shoppers’ social networks to achieve greater personalization and/or drive new sales. For example, Blippy and Swipely publish individual’s purchases in a public feed so that her friends can see, discuss (and envy) them. Kaboodle and ModCloth help shoppers make up their mind by stocking merchandise selections already vetted by website users. Finally, companies like theFind, FFlick and Vitrue tailor shopping experience to reflect visitor’s and her friends’ interests. Thus, rather than browsing some strangers’ comments, visitors can see what their friends think about the film or those racy American Apparel leggings. Companies: Blippy, Swipely, Kaboodle, ModCloth, theFind, Vitrue.

But will it fly?

I bet many a CEO would like to know if social commerce is a real deal or just another fad spawned by the band of usual Silicon Valley suspects. Well, according to latest projections, Vente Privée hopes to bring in €800 million in revenues this year, Gilt Group plans to reach the mark of $450 million. Groupon is adding, on average, 500,000 new users a week and expects to grow to 25 million users by the end of this year. Blippy shares sales data on $1.5 million worth of purchases every week. And I haven’t even started with valuations these companies are attracting (let me tell you this much – Mark Zuckerberg would be proud of these guys). So, despite all the exaggerated buzz, there is something going for social commerce in terms of actual sales it engenders. 

Recent whitepaper published by e-commerce provider Optaros goes as far as to suggest that the rise of social commerce challenges status quo on the most fundamental level: whereas traditional shopper is a rational individual who plans his purchases, studiously compares prices across websites and has little desire for online conversations, the new generation of shoppers are impulsive chatter birds always on the lookout for new exciting deals and opportunity to spread the word around their network. Thus, rather than spending marketing dollars on bringing customers to the site one by one, retailers can simply capture the interest of critical influencers and then ride the wave of (free) word-of-mouth promotion into the world of fat margins and speedy promotions.

As many other cozy illusions, this one does not withstand critical scrutiny. Social commerce model does not provide universal answer to all of retailers’ ills: flash sales still have to prove their appeal outside of apparel category; Groupon’s capacity to accommodate all business owners wishing to be featured on the website is constrained by the number of offers it can send out on any given day; even personalization of shopping experience through Facebook’s social graph is of limited use if you cannot get a critical mass of people to come and click the Like button.

There is, however, no denial to the fact that smart retailers can no longer be content with simply attracting faceless crowds of anonymous web visitors. Shopping just does not feel the same once you remove the joy of sharing the purchase with others.

To know more about the ways you can make your business more social, check Spockly home page.