The forecast is bullish. Experts predict that by 2008, 27% of all e-commerce sales will be generated by multi-merchant product aggregators. Shoppers are expected to use Comparison Shopping Engines to the tune of $54.3 billion in revenues by 2008.
There are primarily two types of prevalent revenue models among online marketplaces – pay per click (PPC) and percentage of sale (POS) or cost per order (CPO) as a means of paying the marketplace. There is also a third type: Froogle.com. Offered by Google, Froogle.com is free. The rest charge merchants based on visits or sales.
Pay per click is how it sounds. Each time a potential shopper clicks thru to your site, you pay a fee. While the fees can be very low per click, it is crucial to monitor your visits closely. If your conversion rates on certain products are low, that is if shoppers are looking but not buying, the clicks are costing money and you may want to discontinue listing those products. That can be a real headache. For instance, if you have 500 products and you’re listed on three PPC shopping search engines, you could be monitoring 1500 products. That’s a lot of man hours. And in many cases it is difficult to get that specific click information from the comparison search engines. In essence, you could be draining significant profits from your business while shoppers visit who have no intention of buying.
Cost Per Order (CPO) Revenue Model on the Rise
Shopping.com will begin testing a universal shopping cart feature over the next couple of months. The service allows shoppers to add products from multiple merchants to a single Shopping.com cart and purchase those products through Shopping.com. The payment system will be powered by PayPal. Merchants participating in the test will be charged on a revenue-share basis as opposed to the standard cost-per-click model. Shopping.com / Paypal will process the transaction and send the necessary information (name, shipping address, quantity ordered, etc.) to the merchant for order fulfillment. There are two ways merchants can receive this information: via FTP and via the Merchant Account Center. The merchant will then send Shopping.com a status update when the order is processed and Shopping.com will relay an order confirmation to the buyer. Buyers can find out about their order status from their cart account on Shopping.com. The buyer will receive one order number even if she buys from multiple retailers. The test isn’t live just yet.
Positives from the Merchant Perspective
Shopping.com’s universal shopping cart should increase conversion rate. Merchants only pay on a CPA basis thus removing all risk from the marketing channel (merchants should now feel comfortable listing entire product databases)
Negatives from the Merchant Perspective
Ceding customer ownership to Shopping.com (Shopping.com controls all communication with the customer. Merchants can’t access a customer‘s e-mail address or phone number. Merchants lose ability to upsell/cross-sell other products during the buying/checkout process which lowers the average order size. ]
Concern about Ceding Customer Ownership in CPO Model
In a proprietary survey of more than 30 online retailers at the 15th Annual eTail Conference in Philadelphia, 81% of the online retailers indicated that they probably will not implement Google Checkout primarily due to the concern about ceding customer ownership to Google. Specifically, online retailers were concerned that Google limits online retailers’ ability to market to customers directly. The online retailers also expressed concern about disintermediation, lack of system flexibility and the perception that Checkout provides Google too much visibility into their business, especially relating to Google search-driven conversion rates. Online retailers were concerned that Google stores all customer information, and Google Checkout limits an online retailer’s ability to directly market to a customer via e-mail. Given the low cost of e-mail marketing once a customer has been acquired, the e-mail marketing limitations placed on online retailers who implement Google Checkout may slow the rate of adoption of Google Checkout.
Online retailers also expressed concern that Google undermines the ability of an online retailer to directly connect with a consumer by requiring Google Checkout users to go to Google Checkout to make changes to orders and transactions instead of to the online retailer’s site. This requirement once again prevents an online retailer from marketing or cross-selling to a user when they return to the site to check order status or to make changes to an order. Similarly, some online retailers did not like how a Google Checkout transaction ends with a Google Checkout page instead of on the online retailer’s web page.
M&A; Activity in this Space is Very Vibrant
Shopzilla est. 2006 earnings = $50m
Shopzilla (acquired by Scripps) deal value = $560m or 11.2x est. 2006 earnings
PriceGrabber est. 2006 earnings = $35.25
PriceGrabber (acquired by Experian) deal value = $485m or 13.8x est. 2006 earnings
Shopping.com est. 2006 earnings = $22.8m
Shopping.com (acquired by eBay) deal value = $476m or 20.9x est. 2006 earnings
Internet Retail Marketplaces – The Landscape at Glance
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