Consumers and Social Media

Stephen DeAngelis

July 20, 2011

In a post entitled Collaboration and Social Media, I indicated that I would write a future post about how consumers are beginning to warm to the idea of using social media outlets as channels to make purchases. There are several ways that social media outlets can be used to generate sales. The first, of course, is directly. Social media sites like Facebook want to go head-to-head with Amazon.com as a place consumers go to buy products. Another way that social media sites can be used is to direct users to stores where they can find the merchandise they are seeking.

The Economist claims, “E-commerce is becoming more social and more connected to the offline world.” [“Selling becomes sociable,” 9 September 2010] The term “offline world” refers to traditional brick-and-mortar stores. The article begins, however, with a discussion about a new company called Swipely. According to the article, Swipely allows users to “publish their purchases. Whenever they swipe their credit or debit card (hence the service’s name), the transaction is listed on the site—to be discussed by other users. ‘Turn purchases into conversations’ is the firm’s mantra.” As the article notes, such digital exhibitionism will likely make “those who cherish privacy … recoil in horror.” The article continues:

“Swipely is among the latest entrants in the growing field of social commerce. Firms in this market combine e-commerce with social networks and other online group activities. They aim to transform shopping both online and off. … The first generation of e-commerce sites, which hit the web in the late 1990s, were essentially digitised mail-order catalogues. Websites like Epinions collected user reviews and recommendations, but they did not sell anything—and many collapsed during the dotcom crash. Only Amazon brought together selling and social feedback, to great effect. By means of collective filtering, it made suggestions based on other buyers’ purchases.”

The article explains that “the second generation of e-commerce firms is quite different.” Interestingly, few of the new e-commerce firms have “emerged from Silicon Valley.” The article continues:

“They tend to have offline roots, and sometimes seek to drive customers to actual shops. Many make their money from flash sales—brief offers of steep discounts on products—that are advertised to registered members. The pioneer of flash sales, Vente Privée, grew out of the French apparel industry (the name means ‘private sale’). Even today, its centre of gravity is offline, says Jacques-Antoine Granjon, Vente Privée’s boss, who founded the firm in 2001 along with seven partners. Hundreds of designers, photographers and hairstylists organise its online sales events. … Vente Privée’s success has inspired others. The best known is Gilt Groupe, which emulates the sample sales of luxury retailers in New York, where it is based. … Gilt Groupe is straying into the territory of another clutch of city-based e-commerce sites, which facilitate collective buying. Every day these sites offer the service of a local business—a restaurant meal, a spa-treatment, the rental of an expensive car—at a discount of up to 90% (they generally keep half of the sale price). But a deal is struck only if a minimum number of members pounce. Buyers thus have an interest in spreading the word, which they do mostly on social networks.”

The territory that Gilt Groupe is straying into is currently held by companies like Groupon and Living Social; organizations that The Economist places in the second generation category of e-commerce companies. The article goes on to discuss a possible “third generation of social-shopping sites.” It continues:

“The latest batch of firms try to build their business on top of the ‘social graph’: the network of friends spun on social networks. They make use of virtual currencies and the growing popularity of smart-phones, which can track consumers’ location. ModCloth, which sells clothing from independent designers, has an active forum on Facebook and lets customers vote on which products the site should stock. Lockerz, another upstart, pays members ‘pointz’ if they watch videos with advertisements, invite friends and do things with them. They can then use this currency to obtain discounts. Similarly, Shopkick rewards consumers for offline activities such as visiting stores and scanning products with their smart-phones. For the new generation of e-commerce firms, the offline world is as important as the online one.”

The article concludes by openly wondering if second and third generation e-commerce companies will prove to be disruptive. It continues:

“It is hard to predict whether the second and third generations of e-commerce sites will continue their rapid growth. Consumers may tire of flash sales, as they did of online auctions. Even collective buying may have its limits. … Whatever the fate of individual firms and sales models, e-commerce is bound to become more social, predicts Sonali de Rycker of Accel Partners, a venture-capital firm. Retailing has several persistent problems: the high cost of attracting visitors, the low probability that they become buyers and the difficulty of getting them to come back. Sociable e-commerce offers potential solutions to all of them. So expect your favourite site to add social features, whereas many of the pioneers will end up with arrows in their backs, as innovators often do.”

To learn more about why The Economist would assert that “many of the pioneers will end up with arrows in their backs,” read my post entitled First to Market vs. Late to the Game. According to a research paper entitled the 2011 Social Commerce Study, “shoppers are willing to interact with retailers through a variety of social networks.” [“Poll: Shoppers Want to Buy via Facebook and Twitter,” Consumer Goods Technology, 1 June 2011]. If true, authors of the article believe that “retailers have limitless opportunities to capitalize on the momentum.” The study was “a joint research project by Shop.org, comScore and Social Shopping Labs.” The article continues:

“Though many retailers use social media to build their brand, research indicates that companies may also be able to monetize these channels. According to the survey, more than half of Facebook users (56 percent) say they have clicked through to a retailer’s Web site because of a Facebook post, while over two-thirds of Twitter users (67 percent) say a post has spurred them to click through to a Web site. Additionally, the appetite for buying directly through social networks appears strong: one-third of shoppers say they would be likely to make a purchase directly from Facebook (35 percent) or Twitter (32 percent).”

The more popular that devices like smartphones, tablet computers, and e-readers become, the more likely it is that shoppers are going to use them for shopping. Fiona Swerdlow, Head of Research at Shop.org, told the CGT staff, “Instead of waiting to get back on their desktop computer to watch videos or interact online, Americans are easily accessing social networks when they have even a few moments of down time, whether they’re scanning Facebook news feeds while picking up their kids from school or tweeting about their shopping experience while browsing the mall.” She continued, “The popularity of mobile devices will only boost the power of social commerce, which presents an incredible opportunity for retailers.”

It should be noted that not all analysts believe that social media represents “an incredible opportunity for retailers.” Todd Wasserman states, “A new study says social media has almost no influence on online purchasing behavior.” [“Social Media Has Little Impact on Online Retail Purchases,” Mashable, 27 April 2011] It’s important to note that Wasserman states the study only refers to “online purchasing behavior.” Some of the second and third generation sites mentioned above are aimed at influencing purchases from physical stores rather than online purchases. Wasserman continues:

“The report, a collaboration between Forrester Research and GSI Commerce, analyzed data captured from online retailers between November 12 and December 20, 2010. The research shows that social media rarely leads directly to purchases online — data indicates that less than 2% of orders were the result of shoppers coming from a social network. The report found email and search advertising were much more effective vehicles for turning browsers into buyers. ‘The best analogy is in the South, a lot of people go to church on Sunday,’ says Fiona Dias, executive vice president of strategy and marketing for GSI Commerce. ‘If you go with the theory that you should market where the people are, then you should be running off to market during church services. Facebook has the same analogy. Buying things from retailers is maybe 10th on the list of things they want to do on Facebook.’ Dias says social media outreach is somewhat effective for distributing news about short-term deals. In that case, 5% to 7% of purchases are influenced by social media activity.”

Retailers and manufacturers should note that social media sites do “seem to work is more traditional online marketing, including email and search advertising.” Wasserman continues:

“Most consumers in the study were exposed to some form of marketing by the retailers before they made their purchase. Seventy-seven percent of transactions in hard goods categories (like lawnmowers) and 82% in soft goods categories (i.e. clothing) occurred after the consumers had engaged in some interactive marketing tactic before their purchase. Forty percent of hard goods transactions and 60% of soft goods transactions came to retail websites directly from email and search.”

That data should be very encouraging for second and third generation e-commerce sites. For social media sites hoping to gain substantial income through advertising, the results are mixed. Wasserman concludes:

“That’s not to say that online advertising plays no role in purchasing decisions. The report found that consumers are exposed to such ads early in the purchase funnel — display ads are the first touchpoint for 13% of soft goods buyers, for instance. Dias says she isn’t surprised by the survey’s results because she’s been telling retail clients for some time that social media outreach is a waste of time and money. Says Dias: ‘It’s been a mystery to me why the media is excited about social media. From a retail and commerce perspective, it seems to have no effect.'”

Obviously, the whole tale has yet to be told about the relationship between social commerce and consumers. Many merchants continue to be social media skeptics. “According to a recent poll, nearly half of small-business owners do not use social media, feeling that it’s not necessary to their business.” [“To Heck With Twitter, Business Owners Say,” by Emily Maltby, Wall Street Journal, 14 July 2011] Maltby continues:

“Only 4% said that they couldn’t do without social media as a marketing tool, compared to 50% who said the same about word-of-mouth recommendations. The survey comes from small-business insurer Hiscox Insurance Company Inc., which commissioned market-research firm Opinium Research LLP to conduct online interviews in late May. The results come from 304 U.S. business owners and managers – more than 200 of which are founders of their companies. All those surveyed have fewer than 250 employees. Of those engaging in social media for business purposes, 28% have a company Facebook page, 18% have a company LinkedIn page or group, and 8% have a company blog. Only 6% have a YouTube or video-streaming channel and 2% have a company Twitter feed. … The most common reasons for using social media, according to the poll, were to increase brand awareness and generate sales. But 10% also said they used social media for research purposes. The Hiscox study supports other research showing that the majority of owners haven’t found social media to be a vital part of their businesses.”

Based on the evidence so far, it seems to me that it is too harsh of a judgment to conclude that social media has “no effect” on retail and commerce. On the other hand, it also seems a bit optimistic to trumpet the “limitless possibilities” of social media retailing in the years ahead.