S-Commerce- A Fourth Retail Channel: An Overview of Social Commerce and What’s Fueling its Growth

Introduction

This section of the Lydian Journal examines the world of social commerce, or as some have described it, the fourth retail channel.

Four distinct elements define this commerce opportunity for merchants: (i) the explosive growth of social networks, in particular, Facebook, (ii) the increasing time that people spend on social networks (at the exclusion of other activities), (iii) the increasing use of social networks for information related to the purchase of products and services, and (iv) the investment that merchants are making in elevating their presence there.

This article provides a foundational framework for examining the potential of social commerce. Future topics will include the challenges of turning fans into customers on social networks, the battle of the social network platforms for social commerce dominance, social commerce in a B2B environment, social commerce around the world, and social commerce business models.

A Brief History of Social Networks

Social networking isn’t all that new. In fact, it’s been a staple of interaction for as long as there have been more than two people on earth. Social networks have evolved as people of similar interests, goals, and backgrounds have come together to make friends, share ideas, and even motivate new ways of thinking.

Social commerce around these social networks isn’t all that new either. Early forms of social networks include the guilds in medieval Europe, trade groups, and unions, which can be traced back to the early 18th century, and more modern venues like the Chamber of Commerce and Rotary Clubs, which have emerged over the last 10 decades as accepted forums for professionals in similar industries and business communities to meet and further commerce, business relationships, and advocate for changes in business practices.

The Internet, however, has really fueled both the creation of and possibilities for social networks and social commerce. In particular, it enabled virtual “meet-ups” on these networks and used them to connect people on and offline in new and different ways. These networks began appearing on the Web in 1997 when the famous – or infamous – SixDegrees.com debuted, enabling for the first time the sort of social interaction that was possible only in the physical world. This early site linked people through their mutual business or personal connections, allowing them to mine their friends (and their friends’ friends) for sales leads, job-hunting tips, friendship, or dates, and even – as the long-standing joke states – their relationship with film star Kevin Bacon.

The tipping point for online social networks, though, can be traced back to 2003 when the perfect storm of the advent of broadband technologies, PC penetration, and the rise of software platforms fueled the entry and massive growth of a new category of online social interaction.

Today, these social networks have successfully reversed the paradigm on the Internet: from users passively receiving information from an assortment of Web pages, to users who actively create information and experiences and then easily share them, including information about their favorite brands and most recent purchases in a dynamic and interesting way. Once primarily a popular way for teens and young adults who grew up online to stay in touch with friends, these networks have evolved to become platforms for engaging people and communities of all demographics and from all regions of the world and a new sales channel for merchants who are able to effectively tap into these communities of interest, sometimes even right on that merchant’s fan page.

The First Force: The Explosive Growth of Social Networks

First, let’s start with the basics – the growth of social networks, and in particular, the explosive growth of Facebook. Social networks continue to evolve at a dizzying pace both in terms of the growth seen in existing sites and in the rapidly growing number of social networks themselves. Today, roughly 40 percent of all people in the United States use social networks in some form or fashion, representing 61 percent of all Internet users. Worldwide, 75 percent of Internet users visit social network or blog sites, a 24 percent increase since last year. [1]
Who are these visitors? Well, just about everyone! Eighty-two percent of 14-17 year olds [2] and 99 percent of 18-24 year olds [3] have a social networking profile. Half (47 percent) of Internet users ages 50-64 and one-in-four (26 percent) users ages 65 and older now use social networking sites. [4]

Most of these people spend their time on Facebook. Worldwide, Facebook has more than 500 million active users (130 million in the United States) – 50 percent who log onto the site on any given day. The company reports users spend over 700 billion minutes per month there. [5] MySpace, which until 2008 was the dominant social network on the globe, today has 122 million users in comparison. [6] MySpace’s growth is certainly moving in the “wrong” direction, but as of October 2010 in the United States, it was still the 10th most-trafficked website on the Internet and third most-frequented social network (5.38 percent), behind Facebook (61.1 percent) and YouTube (18.35 percent). [7]

Twitter, social nets’ micro-blogging cousin, posted 190 million users as of July 2010, who collectively produce an average of 65 million tweets a day. [8] These “tweeters” are predominantly users between the ages of 18-34 who account for 45 percent of all tweets. Unlike Facebook, many Twitter users are passive, as 41 percent of all registered users have never tweeted once, and only 20 percent of users have created a 140-character post more than 10 times. [9]

In the United States, more Facebook users are female than male (54 percent to 42 percent), they are married or in a relationship (44 percent versus 18 percent for single folks) and well educated with more than a third in or having graduated from college. The average user of Facebook is 38 but in an effort to stay in touch with their kids or grandkids (or high school chums), the use of social networks by Americans older than 50 has doubled in the past year with a virtual majority of baby boomers and about one-quarter of the nation’s seniors now using these sites on a regular basis.

Social networks catering to business professionals are also exploding. LinkedIn, has seen its user base grow by 40 percent in 2010 to more than 70 million users worldwide. Executives from all Fortune 500 companies are LinkedIn members, and a new member joins LinkedIn approximately every second. Over half a million LinkedIn groups exist, and 50 percent of Fortune 100 companies hire through LinkedIn. [10] Perhaps not surprisingly, its user profile is slightly older and more affluent with 44 being the average age of users who earn nearly $100,000 annually. [11]

Just what’s driving the popularity of these networks? Social network membership, by design, is an extension of a person’s interests. People join because it is an efficient way to meet people like them and stay in touch with friends, colleagues, and people who share their interests. Once people are there, they find more people who work in the same place, went to the same school, like the same causes, follow the same music, read the same books, eat the same foods, etc. It is this reciprocity that has contributed both to the rise of the leading social networks, creating community on the user’s terms and to the opportunities to form groups with common interests that can now be monetized in new and different ways.

The Second Force: Time Spent on Social Networks

It’s not just that social networks are getting bigger and more pervasive. They are beginning to dominate time spent online.

Globally, it was reported earlier this year that more than 300 million people spent 113 billion minutes on social networking sites; representing a 20 percent annual growth in audience and more than 100 percent annual growth in minutes from one year ago. The global average time spent per person on social networking sites is now nearly five and half hours per month, a nearly two hour increase from 2009. In August 2010, U.S. Internet users spent 41.1 billion minutes on Facebook, surpassing Google’s 39.8 billion minutes for the first time.

Time spent on social networks Facebook and Twitter accounts for nearly one-quarter of the time spent online for Americans, up nearly 50 percent from a year ago and eclipsing online activities like online gaming, e-mail, and instant messaging. This is not really all that surprising, given the fact that people can do all of that within these social networks. People can play games like FarmVille, Mafia Wars, and SuperPoke! Pets without ever leaving Facebook or MySpace, “converse” with friends via comments to their posts, and IM friends via those platforms, thus economizing their time in an already time-pressured world on a platform that has become ubiquitous. [12]

These time constraints are also a driver for the movement of social networks from activities performed at computers at home or at work to activities that can be easily performed anywhere from a mobile phone. Social networking via mobile browsers increased from 6.5 percent to 11 percent between January 2009 and January 2010, mainly due to increased usage of smartphones, the iPhone in particular. There are more than 150 million active users currently accessing Facebook through their mobile devices, and people that use Facebook on their mobile devices are twice as active on Facebook than non-mobile users. Of Twitter’s active users, 37 percent use their phone to tweet. [13]

The Third Force: Use of Social Networks as an Information Resource

A sociologist would define a community as a group of people who interact and share a common location. The Internet enables online social networks as the common location where people can connect with their friends or make new ones – irrespective of physical location. People join social networks because they want to be part of a connected community. Once there, these members willingly disclose quite a bit of information about themselves – their careers, education, interests, hobbies, and even their political and religious interests.
According to Facebook, the average user has 130 friends, creates 90 pieces of content each month, and is connected to 80 community pages, groups, and events. More than 30 billion pieces of content (Web links, news stories, blog posts, notes, photo albums, etc.) are shared each month on Facebook. These numbers continually rise as more people join and interact on the network.

These users trust both the platform and the friends they have allowed to be part of their own personal networks with that information. They also willingly share information about just about everything on their feeds and in their status, in spite of the recent firestorm over data leaks on the platform.

Trust in the platform is obviously essential in garnering an audience because users who don’t trust the network or its members will not frequent the site or find value in it. Social network users who have greater trust in their peers are more willing to actively engage with the respective site, including to make purchases.

This is an extremely relevant point as it relates to turning social network fans into customers for merchants. Peer-to-peer word of mouth has always been a highly valued source of credible, dependable information, as the best referral is from a “person just like me.” [14]
Social media platforms, in particular, not only make that feedback more readily available, but also richer and more robust. Nearly 50 percent of consumers use social networks for product referrals.

Approximately 49 percent of consumers use social media to learn about offers, and 45 percent use the social media space to learn about products, predominantly from their friends who post news and updates in their status feeds. Fifty-three percent of people on Twitter recommend companies and/or products in their Tweets, with 48 percent of them delivering on their intention to buy the product. [15] Sixty-seven percent of shoppers spend more online after recommendations from an online community of friends. A recent survey by the Opinion Research Center revealed 84 percent of Americans say online customer evaluations have an influence on their decision to purchase a product or service, and 82 percent of those who go online to research a product will buy that product online. Now, however, after friends and family, the top driver for brand trust is online reviews and feedback from the social media space.

The Fourth Force: Merchant Investment in Social Networks

The Web will be involved in 53 percent of total retail sales by 2014 as consumers increasingly use the Internet to research products before buying. [16] In fact, roughly 83 percent of U.S. consumers shop online at least once a week.
When coupled with the fact that consumer recommendations are the most trusted “advertising” medium for Internet users and time on Facebook (in particular) accounts for more of the time people spend online. Merchants and their marketers increasingly view it as an important and convenient sales channel with which to turn fans into customers. [17]

Nearly 100 percent of all major retailers will have a fan page on Facebook by the end of 2010 for one good reason: Traffic to their own websites is being cannibalized by traffic to their fan pages on Facebook, and those fans tend to be more willing to buy and advocate on behalf of the brand.

Globally, just about a third of Internet users connecting with a brand now do so on a social network, while the proportion of those checking out brand sites has dropped over the past two years. At the same time, just about one-half of all of the Internet users worldwide have joined an online brand community, and after doing so, feel more positive about the brand. Reports suggest that nearly three-quarters of these fans are more likely to buy the brand they say they “like,” feel more loyal, and most importantly, recommend others to join. [18] It is this viral sharing that makes social networks so engaging for its users and so potentially game-changing for merchants who can acquire customers more cost effectively through these friend referrals.

While imperfect and still quite imprecise, we’re beginning to see research that establishes a value of a Facebook fan to merchants. Reports suggest that an average Facebook fan is worth about $136.38. For some very successful social marketers, the value can be dramatically higher, and for some less successful companies, it can be virtually zero. [19] This same source suggests that, on average, Facebook fans spend an extra $71.84 they would not otherwise spend on products they describe themselves as fans of, compared to those who are not fans. More than half of people on Twitter recommend companies and/or products in their Tweets, with just about that same percentage actually following through to buy that product. [20]

Who’s Turning Visits Into Cash

Although many merchants are keen on the idea of using social networks as platforms for conducting commerce, only a small number of them actually transact on those platforms, and fewer still have tapped into the “mother lode” of group dynamics that these networks can foster. Efforts to tap into commerce in a more social way fall into three distinct categories:

• Using a shopping cart to facilitate checkout on Facebook. Pavyment is probably the most well known of these enablers and uses PayPal as its payment backend. It launched in November 2009 and claims to have roughly 30,000 businesses and individuals who have used the app, with more than 500,000 Facebook users who have shopped for products in stores using it. It is a pure-technology play and provides a shopping cart, the ability to offer fan discounts, a search tool, and the ability for customers to add comments and reviews. Although technology makes commerce possible, it still falls to the merchant to promote and engage the social network and drive traffic to their fan page.

• Using deal sites off social networks to drive sales at a discount (in the hopes that deal customers convert into repeat customers). Groupon and Living Social are probably the most well known of these social commerce schemes, although at last count there were roughly 200 “knocks-offs” attempting to replicate its success. Their focus is mostly services and on the long-tail, local retailers. These “loss leaders” drive mostly unprofitable sales to local merchants who hope to convert “trials” into long term customer relationships.

• Promotional activities on social networks that drive activity to their existing merchant websites or even physical stores. Here schemes abound – including Macy’s Virtual Mirror that enables shoppers to friend-source product recommendations while in stores – to the Neiman Marcus Midday Dash promoted on their fan pages to Jet Blue’s weekly Twitter promotions. These marketing initiatives are mostly one-off efforts to drive a sales spike and are hard both to track and scale.

Conclusion

The four forces discussed in this piece illustrate why the time is right for social commerce, and why it is ripe to happen inside of social networks, and in particular, Facebook. Over the last two years, we’ve seen a sea-change take place in both the growth of these networks and how people interact on them. The fear of transacting online that kept eCommerce from igniting in its early days seems not to exist on these networks. Visitors now seem to expect to see offers and promotions from their favorite brands. The logical extension is to enable them to transact without ever leaving that fan page.

Most of the existing social commerce initiatives run the gamut from technology enablers – in essence providing a social network shopping cart to group deal sites that encourage sharing on and off social networks – to social media campaigns on social networks that drive commerce back to an existing merchant website. Scant few have mobilized the group dynamics that make these networks such an attractive environment for low customer acquisition through the viral sharing that takes place when people “advocate” for a product or service and their friends follow suit. That scenario seems not to exist just yet, in part because creating that experience on Facebook and other social networks is a technology feat made more challenging given the pace at which Facebook changes its API and the knowledge needed to really ignite group dynamics. Yet, this is the sweet spot of social commerce and where the great opportunity really lives for merchants, the social networks themselves, and aspiring entrepreneurs.

Time will tell for all of the energetic entrepreneurs who dream of Groupon-like valuations. One thing is for sure. We are at the very beginning of what will be an incredible opportunity for merchants, consumers, and the social networks themselves to drive commerce in ways that have never been done before.

Endnotes

[1] http://blog.nielsen.com/nielsenwire/global/social-media-accounts-for-22-percent-of-time-online/

[2] http://itsjosipnotjoseph.com/2010/08/26-facts-about-millennials-online-social-and-mobile-behaviors/

[3] http://doteduguru.com/id3021-social-networking-research-99-of-your-audience-are-on-them-still-need-more-convincing.html

[4] http://pewresearch.org/pubs/1711/older-adults-social-networking-facebook-twitter

[5] http://www.facebook.com/press/info.php?statistics

[6] http://www.informationweek.com/news/infrastructure/remote_access/showArticle.jhtml?articleID=228000187&cid=RSSfeed_IWK_All

[7] http://www.hitwise.com/us/datacenter/main/dashboard-10133.html

[8] http://econsultancy.com/us/blog/6205-revised-mind-blowing-social-media-statistics-revisited-and-20+-more

[9] http://www.digitalbuzzblog.com/infographic-twitter-statistics-facts-figures/

[10] http://econsultancy.com/us/blog/6205-revised-mind-blowing-social-media-statistics-revisited-and-20+-more

[11] http://royal.pingdom.com/2010/02/16/study-ages-of-social-network-users/

[12] http://itmanagement.earthweb.com/features/article.php/3896501/Social-Networks-Trounce-Email-in-Study.htm

[13] http://www.huffingtonpost.com/2010/04/14/twitter-user-statistics-r_n_537992.html

[14] Edelman Trust, Barometer, 2008

[15] ROI Research for Performance, June 2010

[16] Forrester report in March 2010

[17] The Nielsen Company. Trust in Advertising. October 2007.

[18] http://socialcommercetoday.com/social-media-stats-global-for-branding-social-networks-not-websites-rule/

[19] http://gigaom.com/2010/06/11/how-much-is-a-facebook-fan-really-worth/

[20] ROI Research for Performance, June 2010