Online Marketplaces: Market Outlook, Revenue Models and Recent Trends
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
