Facebook e-commerce: the next big thing?

SAN FRANCISCO Thu Apr 5, 2012 11:40am EDT

Facebook Director of Marketing Mike Hoefflinger announces a new ''Premium on Facebook'' service as he delivers a keynote address at Facebook's ''fMC'' global event for marketers in New York City, February 29, 2012. REUTERS/Mike Segar

Facebook Director of Marketing Mike Hoefflinger announces a new ''Premium on Facebook'' service as he delivers a keynote address at Facebook's ''fMC'' global event for marketers in New York City, February 29, 2012.

Credit: Reuters/Mike Segar

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SAN FRANCISCO (Reuters) - A group of e-commerce start-ups, backed by some of the tech world's most pedigreed financiers, are betting that Facebook Inc can become an e-commerce powerhouse to rival Amazon.com Inc and eBay Inc.

As the world's largest social network hurtles toward a $5 billion initial public offering, it will come under more pressure from Wall Street to find new sources of profit growth and reduce its reliance on advertising, which accounted for 85 percent of its 2011 revenue.

Some entrepreneurs and investors increasingly think "f-commerce" - meaning e-commerce on Facebook - is the answer. Start-ups such as BeachMint, Yardsellr, Oodle and Fab.com are coming up with novel ways to persuade Facebook users to not just connect with friends on the social network, but to shop as well.

Backed by tens of millions of dollars from venture capital firms like Accel Partners and Andreessen Horowitz, and other big investors like Goldman Sachs, these start-ups are pushing out shopping apps, hosting online garage sales and testing out new business models on Facebook.

"E-commerce is a huge category with very strong tailwinds and it's a natural move for Facebook," said Sam Schwerin of Millennium Technology Value Partners, which owns Facebook shares and has a stake in BeachMint.

Amazon revolutionized online shopping by crunching lots of customer and purchase data to come up with relevant, personalized recommendations. In the same vein, Facebook's combination of data, analytics and payment technology could fuel the next generation of e-commerce, Schwerin said.

Harvard MBA David Fisch, a former executive at eBay's StubHub online tickets business, oversees Facebook's e-commerce efforts, working with retailers to build social commerce businesses on the platform.

"People have always shopped with their friends; now they expect it online," Fisch wrote in a December blog. "Companies who think differently about social will find success."

Fisch declined to comment, but investors said Facebook understands the importance of having an e-commerce strategy.

"It's a big imperative for them," said Theresia Gouw Ranzetta of Accel Partners, an early backer of Facebook. "They understand it's an important strategic benefit for them to make e-commerce players successful on the platform."

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Graphic: e-commerce's lure link.reuters.com/qac57s

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BIG BRAND STORES FLOP

Facebook had 845 million monthly active users at the end of 2011, far higher than Amazon's 164 million active accounts or the eBay online marketplace's 100 million active users.

But despite that huge base, Facebook is primarily a way to connect with friends, and not an online shopper's first destination. Big retailers including J.C. Penney, Gap and Nordstrom had previously set up stores on Facebook but shut them after generating few sales.

That has not stopped venture capital firms from pouring money into rookie companies they think have cracked the code.

There is a lot of buzz about Fab.com, which has amassed 3 million users who broadcast purchases via a "bought" button that advertises their shopping habits to friends. Fab built its user base in part by offering $5 a month to those who agree to share their Fab purchases and favorites on Facebook. Chief Executive Jason Goldberg said "tens of thousands" opted in.

BeachMint co-founder Diego Berdakin said his company had set up a live video event called StyleMint.tv last holiday season featuring a brief appearance by Facebook CEO Mark Zuckerberg's sister, Randi Zuckerberg. For about two hours, they showcased BeachMint products that people could buy with one click.

More than 50,000 Facebook users watched the show and a "huge percentage" bought something, Berdakin said, adding, "At the time, it was the biggest day in our history in terms of sales."

Yardsellr, started in 2010 by former eBay manager Danny Leffel, organizes people into 3,000 communities, or "blocks," based on common interests. When someone posts a product for sale, it is sent to the news feeds of people in that block and purchases can be made with a few clicks.

Gross merchandise sales, a measure of the value of products, has been growing about 30 percent a month, according to Leffel. "Social commerce could be bigger than eBay," he argued.

Then there's Oodle, a start-up headed by Craig Donato, who runs Facebook's official marketplace, which boasts more than 3 million unique monthly users. When buyers and sellers post items, their Facebook identities are attached, giving users more confidence in the transactions, Donato said.

MAKING MONEY

For now, Facebook is making money mostly by selling ads to merchants trying to target potential customers. But many experts say it is a matter of time before the eight-year-old social network will ask for a cut of shopping transactions, or seek other ways to profit.

They point to Facebook's relationship with online games developer Zynga Inc as an example. Facebook takes a 30 percent cut of revenue generated from the sale of virtual goods used to play Zynga games.

Gamers pay for those virtual goods using Facebook Credits, a virtual currency that could eventually be used to buy physical goods, according to some Internet entrepreneurs.

"Facebook has a huge opportunity to monetize e-commerce," said Christian Taylor, chief executive of Payvment, a startup that operates thousands of Facebook stores. "They have the infrastructure and team to pursue that."

Others downplay the potential for Facebook Credits, saying physical goods offer much thinner profit margins than virtual products.

"The 30 percent model is great for products with near-zero cost of goods sold," said Kevin Hartz, head of ticketing start-up Eventbrite, which works closely with Facebook. "But selling a TV with thin margins, that model will just not apply."

Nevertheless, if e-commerce on Facebook takes off, many expect the social network to find a way to make money off it.

"When you build on top of a platform like Facebook, there is always the risk that the platform provider decides to change the rules later on," said Laura Valverde of Beetailer, which runs more than 3,000 stores on Facebook.

"We have seen this with Facebook Credits and games. So, once social commerce fully takes off, it will only be natural that Facebook tries to benefit one way or another from it."

(Editing by Edwin Chan, Tiffany Wu and Bob Burgdorfer)

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Comments (3)
miaperry wrote:
Facebook is already directly responsible for billions of dollars of 3rd party commerce transactions resulting in its social plugins and Open Graph API.
There are great examples for F-commerce campaigns like the launch of Heinz ‘Get Well’ Soup cans: 4 weeks, 2,127 sales – 1 sale per 8 fans – and a 200% (32,810) increase in Facebook ‘Likes’.

We at StoreYa (http://www.StoreYa.com), see an enormous traction, there’s an amazing daily growth of merchants, creating their own Facebook shops. There’s no doubt that F-commerce is the next step in the eCommerce evolution, but it will take some time.

Duplicating your eCommerce store to Facebook will not do the trick..You must provide the merchants with engagement tools, such as: Fans-firsts, Fans exclusive deals & discounts, this adds an important added value to the social shopping experience.

Mia

Apr 05, 2012 9:14am EDT  --  Report as abuse
The big challenge for Facebook is that while it may have lots of traffic, people don’t go there to shop. Sucharita Mulpuru, an analyst at Forrester Research, refers to this as “like trying to sell stuff to people while they’re hanging out with their friends at the bar.”

You can always use exclusive incentives to get people to shop on Facebook, but sooner or later you need to ask yourself whether this makes sense. The same promotions can be used to drive traffic to the ecommerce store just as effectively, where the buyer will most likely spend more than they would on Facebook. Until evidence emerges that Facebook storefronts are additive and create incremental sales, they are doomed to failure.

Where f-commerce has a definite role to play is where the product being sold is inherently a social activity: Gaming, entertainment, travel, music etc all spring to mind. Equally it’s a great venue for launching products or creating promotional buzz.

I’ve blogged about this here http://seewhy.com/blog/2012/02/21/facebook-commerce/. In particular I think the bigger opportunity than f-commerce is to make ecommerce more social, and the Social Graph enables exactly that. Adoption and use of it is in its infancy, but it is spreading steadily.

What we should be thinking more about is how we can make shopping inherently more social, rather than cannibalizing ecommerce sales with promotions just to promote a different storefront.

Apr 05, 2012 1:26pm EDT  --  Report as abuse
LisaLoeffler wrote:
Did anyone notice the quotes in this story are from Facebook (share) investors or from those whose business success is tied directly to Facebook e-commerce platforms?

Virtual goods don’t fall under mainstream shopping (it’s gaming) and sharing purchases you make with your friends on Facebook are occurring on 3rd party platforms (websites, e-commerce sites) – not directly on Facebook (that often).

Like PPC ads, Facebook is ultimately just a driver to push people to external platforms to purchase a product or do more research to make a final purchase decision.

Facebook is not designed exclusively for shopping like Amazon or Ebay…thus ultimately will not be a mainstream environment where buyers consciously go to shop unless they develop a platform that compliments this type of action.

People go to Facebook to see what their friends are doing first….NOT to shop.

Unless Facebook makes some big changes in its environment and platform…shopping is never going to be the main driver for people to go there.

Apr 09, 2012 10:20am EDT  --  Report as abuse
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