For E-tailers, Google is Like a Drug

For e-tailers, Google is like a drug. It makes you feel real good about yourself (cause its profitable and helps your business grow), but you have a sneaking suspicion that it is really the one in control and one day you might need it more than it needs you.

Well, that day has come with the introduction of Google Wallet & Google Marketplace. Remember buyer acquisition cost? It is usually magnitudes cheaper to get an existing customer to purchase again than to acquire a brand new customer. Thus, for e-tailers’ (often with tiny margins) the key to profitability is how to convert new buyers into repeat buyers. They often do this through brand marketing techniques such as merchandizing, cross/up selling, personalization, and branding. Search engines plays to the double edge sword of this critical e-tail strategy. Because buyers have shown that they are willing to go through an intermediary in the shopping experience, search engines has become an important source of new customer for e-tailers. In return, E-tailers hope to convert these new customers into repeat customers who visit their site exclusively or atleast repeatedly. The problem is that shopping engine often becomes de-facto first destination for any e-commerce sojourn (a series of click/web destinations/pages which an internet user go through for a particular session). When buyers essentially land on the product specific page to buy a specific item, it reduces the e-tailers’opportunity to create lock in through brand marketing techniques (buyers spend significantly less “clicks” on the website). Instead, the industry is reduced to direct marketers selling one item at a time tilting the balance of power to either side of the value chain: search engines and branded manufacturers.

As an aside, the largest switching cost for buyers in the online world is shipping fees while in the offline world its gasoline & time. Amazon strategy of free shipping and $75 annual fee for “platinum” expedited shipping is a direct effort to increase switching cost of their buyers, increase loyalty, increase product bundling (user NEEDS to stay on the site longer to buy more item thus more opportunity for marketing), and thus reducing the effect of search/shopping engines in commoditizing the e-tail industry into a series of product landing pages.

Now that Google has launched a marketplace & a payment solution, e-tailers are relegated to an even smaller role of a webmaster: trying to create product landing pages with the optimal look and feel.

For Google it makes a lot of sense.

1. It owns the buyer relationship

2. It owns seller relationship via adwords/adsense

3. It lowers switching cost of de-bundling a search engine initiated shopping experience. I.e. buying product x and product y from Amazon and J.Crew requires 2 checkout processes usually for the end user. This creates a big hassel for the end buyer which helps Amazon retain the buyer who entered through Foogle looking for product X to also stay longer and buy product Y. However if both Amazon & J.Crew uses Google Wallet, its one checkout process reducing end user hassel. As a result, e-tailers are further commoditized and switching cost lowered. By introducing Google Wallet, Google will increase the use of froogle and its seach engine as a shopping destination, creating a virtuous cycle of increased usage between Wallet and Froogle/Google Search.

4. Even more importantly, it owns a billing relationship with sellers who can use the same adwords deposit account as a “checking account” for their payment solution. Google probably pays ~ 150M (~5B revenue *3% cc fee) in credit card transaction fees. By giving sellers a credit & debit relationship with Google, they can potentially save a huge amount of that COGS even if they offer the service at a free or below industry cost price point.

I used some publicly available traffic data to get a sense of Google’s positioning in the B2C e-commerce world. The analysis is based on data from Netratings’ Jan 2005 web traffic log. (Branded e-tailers are non-platform (non-distributed) based e-commerce companies) Due to limitation of the data, I’m not sure which e-tailers Netratings tracks. As a result, the data might be significantly under-reporting the share of total e-commerce market by smaller mom & pop e-tailers.

Amazon is the company most threatened by Google’s expansion into the entire value chain of the e-tailing industry. Branded E-tailers are less dependent than the more sophisticated Amazon. Search engines and shopping engines could potential siphon away 37% of Amazon’s revenue. I don’t know what % is Google, but a conservative guess is that 15% of Amazon’s traffic comes from Google, and 15% of Amazon’s customers & revenue is now in play for Google to steal.

In general it seems like Google total addressable volume for Google Wallet & Marketplace from the buyer perspective is atleast 10% of the total e-commerce spend of $120B (source: Jupiter 2005) – $12B (wow) without even expanding its share of the overall e-commerce sojourns.

Seller Analysis:

Ofcourse, since this is a platform play, this analysis would not be complete w/o looking at it from the seller’s perspective. Furthermore, in a “AND” type of analysis, it’s the smaller number that defines the market opportunity and not the larger number.

With this, comes the Achilles’ heel of Google’s b2c transaction strategy. From the sellers’s perspective they can reach about 75% of the buyer sojourns without ever needing to use Google or a search engine. By selling on eBay, Amazon, plus having their own website they would have access to about 75% of the total market. (remember that eBay & Amazon is essentially acting like an SEO company by buying keywords for sellers, so yes Google had a role in the transaction for the buyer but eBay/Amazon owns the seller relationship). Google only offers them UNIQUE customers in 2-4% of the cases. Under such a scenario, Google will have to under cut Amazon/eBay/CGI Commerce-like site builder’s fees to get seller’s to switch. (Currently with the growth of adwords/adsense, I would have to guess that in certain circumstance it must be cheaper than other marketing methods for sellers) Not that offering something cheaper is a bad strategy, just that it not as good as offering something unique!

History repeats itself. IBM made MSFT and MSFT turned around and kicked it ass. Google did the same thing to Yahoo! (not kicking ass, more like formidable competition). Now, Google is trying to do the same to its e-tail advertisers betting that they would not be able to detox themselves from their PPC addiction. Many e-tailers are caught between a rock and a hard place; the winning strategy against Google’s encroachment is not clear at least publicly. Things are about to get real interesting. I would be interested to see which major e-tailers begin to cut their ppc spending on Google and increase spends in other channels to ween themselves off Google - even if it costs more.

Disclaimer! All opinion stated here are mine and no one else. All information presented here is sourced from the internet via search engines and not from proprietary sources. I currently do not have access or understanding of any company’s respective proprietary strategy, analysis or thought on Google Wallet.