Why Online2Offline Commerce Is A Trillion Dollar Business

What Is Online-To-Offline (O2O) Commerce?

Online-to-offline (O2O) commerce is a business strategy that draws potential customers from online channels to make purchases in physical stores. Online-to-offline (O2O) commerce identifies customers in the online space, such as through emails and Internet advertising, and then uses a variety of tools and approaches to entice the customers to leave the online space. This type of strategy incorporates techniques used in online marketing with those used in brick-and-mortar marketing.

With the growth of local commerce on the Web, the links between online and physical commerce are becoming stronger. In this guest post, Alex Rampell, the CEO and founder of TrialPay, explores the forces behind what he calls “online2offline” commerce.

• Online-to-offline (O2O) commerce is a business model that draws potential customers from online channels to make purchases in physical stores.
• Techniques that O2O commerce companies may employ include in-store pick-up of items purchased online, allowing items purchased online to be returned at a physical store, and allowing customers to place orders online while at a physical store.
• Amazon’s purchase of Whole Foods Markets and Walmart’s acquisition of Jet.com are two examples of O2O commerce.
• Target, Walmart, Kroger, Nordstrom, and many other retailers have increased home delivery and/or curbside pickup services as two effective O2O strategies to meet consumer needs for safe shopping options.

What do Groupon, OpenTable, Restaurant.com, and SpaFinder all have in common? They grease the wheels of online-to-offline commerce.

Groupon’s growth has been nothing short of extraordinary, but it’s merely a small subset of an even larger category which I’d like to call online-to-offline commerce, or On2Off (O2O) commerce, in the vein of other commerce terms like B2C, B2B, and C2C.

Bear with me. The key to O2O is that it finds consumers online and brings them into real-world stores. It is a combination of payment model and foot traffic generator for merchants (as well as a “discovery” mechanism for consumers) that creates offline purchases. It is inherently measurable, since every transaction (or reservation, for things like OpenTable) happens online. This is distinctively different from the directory model (think: Yelp, CitySearch, etc) in that the addition of payment helps quantify performance and close the loop—more on that later.

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In retrospect, the fact that this is “big,” or that Groupon has been able to grow high-margin revenues faster than almost any other company in the history of the Internet, seems pretty obvious. Your average ecommerce shopper spends about $1,000 per year. Let’s say your average American earns about $40,000 per year. What happens to the other $39,000? (The delta is higher when you consider that ecommerce shoppers are higher-income Americans than most, but the point is the same).

Answer: most of it (disposable income after taxes) is spent locally. You spend money at coffee shops, bars, gyms, restaurants, gas stations, plumbers, dry-cleaners, and hair salons. Excluding travel, online B2C commerce is largely stuff that you order online and gets shipped to you in a box. It’s boring, although the ecommerce industry has figured out an increasing number of items to sell online (witness Zappos’s success with shoes: $0->$1B in 10 years, or BlueNile’s with jewelry).

How Online-To-Offline (O2O) Commerce Works

Retailers once fretted that they would not be able to compete with e-commerce companies that sold goods online, especially in terms of price and selection. Physical stores required high fixed costs (rent) and many employees to run the stores and, because of limited space, they were unable to offer as wide a selection of goods. Online retailers could offer a vast selection without having to pay for as many employees and only needed access to shipping companies in order to sell their goods.

Some companies that have both an online presence and an offline presence (physical stores) treat the two different channels as complements rather than competitors. The goal of online-to-offline commerce is to create product and service awareness online, allowing potential customers to research different offerings and then visit the local brick-and-mortar store to make a purchase. Techniques that O2O commerce companies may employ include in-store pick-up of items purchased online, allowing items purchased online to be returned at a physical store, and allowing customers to place orders online while at a physical store.

FedEx can’t deliver social experiences like restaurants, bars, Yoga, sailing, tennis lessons, or pole dancing, but Groupon does. Moreover, for your locally owned and operated Yoga studio, there is little marginal cost to add customers to a partially filled class, meaning that the business model of reselling “local” is often more lucrative than the traditional ecommerce model of buying commodity inventory low, selling it higher, and keeping the difference while managing perishable or depreciating inventory.

The important thing about companies like O2O commerce companies is that performance is readily quantifiable, which is one of the tenets of O2O commerce. Traditional ecommerce tracks conversion using things like cookies and pixels. Zappos can determine their ROI for online marketing because every completed order has “tracking code” on the confirmation page. Offline commerce doesn’t have this luxury; the bouncer at the bar isn’t examining your iPhone’s browsing history. But O2O makes this easy; because the transaction happens online, the same tools are now available to the offline world, and the whole thing is brokered via intermediaries like OpenTable or SpaFinder. This has proven to be a far more profitable and scalable model than selling advertising to local establishments; it’s entirely due to the collection of payment by the online intermediary.

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Does Groupon deserve a billion-dollar valuation? It’s easy to see a world where O2O commerce dwarfs traditional (stuff in a box) e-commerce—simply because offline commerce itself dwarfs online commerce, and O2O is simply shifting the discovery and payment online. If Groupon can grow its leadership position, I predict a multi-billion dollar valuation based on discounted cash flow alone. Groupon is not a gimmick or a game, but a successful example of offline commerce being driven by an online storefront and transaction engine.

Venture capitalists and entrepreneurs would be wise to think beyond cloning the “deal of the day” concept—and instead think about how the discovery, payment, and performance measurement of offline commerce can move online. This will have ripple effects across the whole Internet industry — advertising, payments, and commerce — as trillions of dollars in local consumer spending increasingly begin online.

Special Considerations

The rise of online-to-offline commerce has not eliminated the advantages that e-commerce companies enjoy. Companies with brick-and-mortar stores will still have customers that visit physical stores in order to see how an item fits or looks, or to compare pricing, only to ultimately make the purchase online (referred to as “showrooming”). The goal, therefore, is to attract a certain type of customer who is open to walking or driving to a local store rather than waiting for a package to arrive in the mail.

Online-to-offline (O2O) is related to, but not the same as, the concepts of “clicks-to-bricks” or “click-and-mortar” models.

Online-To-Offline (O2O) Commerce Trends

Consider Amazon’s $13.7 billion purchase of Whole Foods in 2017 and you can see where the leader in online commerce is placing some of its bets—in physical space.1 Amazon will even let you pay with your Amazon Prime credit card at Whole Foods and earn 5% rewards, the same as if you used your Amazon card to pay online.2

That’s not to say that traditional retailers aren’t hedging their bets as well. Walmart has spent mightily to bridge the gap between online users and retail locations, including its 2016 purchase of e-commerce company Jet.com for approximately $3 billion. One of Walmart’s goals for the acquisition was to make inroads in reaching city dwellers and millennial customers, demographics that Jet had excelled in attracting with their massive user base that added about 400,000 new shoppers each month.3

Acquiring companies that already have a huge online shopping customer base is just one O2O commerce strategy retailers like Walmart are using. Expanded services like home grocery delivery and curbside pickup are other O2O services that retailers offer. Target, Walmart, Kroger, Nordstrom, and many other retailers all offer contactless curbside pickup. This service enables shoppers to buy what they need in a safe and timely manner without having to enter the store or leave their car. Walmart executives see these types of value-added services as key to the company’s growth and reported that e-commerce sales grew 97% in the U.S. in the second quarter of 2020.4

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