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November 09, 2015
Retailers must embrace new mobile-powered O2O business models
By: Todd Shingler

In response to the shift to an on-demand economy, retailers, especially established, traditional brands, must create new business models that include omni-channel support and marketing.

Digital Disruption continues to change consumer expectations on convenience and seamless experience and continues to spur business model creativity across entire industries.  Perhaps no industry has been more effected than the retail industry which has seen a huge shift in online economics in the past five years. For example, the shift towards same-day and on-demand delivery has resulted in the need to build regional distribution centers, establish third-party fulfillment relationships and enroll physical stores in fulfilling online orders or supporting in-store pickup (McKinsey).

For years, retailers have been evolving from single channel (in-store only or online only) to multi-channel (separate in-store, online and/or mobile channels) to Omni-channel (integrated in-store, online and mobile channels) experiences. Mobile commerce (shopping via smartphones) has driven the new economy for both online only and traditional retailers. According to Internet Retailer, mobile commerce now accounts for 30% of all e-commerce in the U.S. and is expected to grow at 3x the rate of e-commerce in 2015.  Mobile commerce growth in Europe and Asia is even higher. Criteo is forecasting the mobile share to reach 33% in the US, and 40% globally by the end of 2015.

Online only retailers initially focused on competing with physical retailers primarily on price, often offering free-shipping as an added incentive to ‘not leave home’.  Physical retailers focused on offering better ‘service’, relying on the instant gratification of walking out with products and betting on consumers wanting to ‘touch and feel’ products before buying to rationalize not trying to compete on price.

This was driven by real-time communications and the app revolution, and on-demand delivery services like GrubHub, seamless mobile payment innovations as in Starbucks’ mobile app. Start-ups like Uber—who completely disrupted a decades old industry by combining on-demand convenience, mobile payments, and crowdsourced drivers into a seamless, primarily smartphone powered, experience.  Dozens of other innovative companies have found their way onto consumer’s smartphones—offering better prices, better service, and more convenience.

One example, Jet, is a newly launched mobile-only app that offers an Amazon-like shopping experience, with the purchased products fulfilled directly by other online and physical retailers. Rather than maintaining their own fulfilment warehouses like Amazon, Jet simply routes orders to whichever retailer is willing to fulfil the order at the lowest price. Consumers can get additional discounts by foregoing free returns and unlock even better prices on other items that can be fulfilled by the same retailer.

So while 90% of retail sales in 2014 happened in physical stores and 95% of retail sales went to retailers who have physical retail stores (AT Kearney), there is a continual blurring as traditional online and physical retailers try to win consumers over with a combination of price, convenience and service—while also exploring new business and partnership models.

As the battle for consumers continues to escalate, online retailers are exploring a range of Online to Offline (O2O) business models—from on-demand same-day delivery (e.g. Amazon Prime users are encouraged to ‘skip the trip’ and opt for 1-2 hour delivery), to use of pick-up lockers for 24x7 convenience, to opening small pop-up and store-in-store locations, to opening larger experience and flagship stores, to forming partnerships with physical store chains to offer customers pickup and return services at locations nearby their home or work locations.

Likewise, physical retailers are themselves trying new on-demand and convenience services—partnering with delivery services like Postmates and Instacart for same-day (and faster) delivery, offering curbside and in-store pickup, fulfilling orders from Amazon competitor Jet, and opening their own stores in online shopping malls such as Alibaba’s T-Mall portal in China.  Other retailers are competing with online and in-store price-matching, with their own free delivery services and embracing digital and mobile technologies to offer amazing in-store experiences.

While it’s unclear whether these new business models will prove successful (or profitable), what is clear is that retailers are ready to experiment to find out—and consumers will ultimately benefit the most—getting to decide when, where, how and with whom to spend their money.

A few key implications for retailers in the age of the Digital customer:

  • Leading retailers must quickly embrace O2O as a long term, fundamental opportunity

  • Put the ‘customer’ at the center of O2O plans, as their expectations and behaviors are continuously re-shaped by digital and mobile capabilities

  • Retailers should identify top technology and channel partners, which are critical to building and growing O2O successfully

  • Invest in key technologies such as mobile payments and analytics to gain holistic customer insights

  • Retailers must embrace an agile approach to test, learn, and evolve O2O initiatives in order to innovate

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