The formula to create a trillion dollar Online to Offline industry


The unfulfilled promises of online to offline have left us all a bit deflated. It seemed like such a perfect fit, everyone is online and 93% of commerce is still offline, just connect the two worlds and a massive O2O industry will be born! We've heard this message at every conference since Hootie and the Blowfish were actually popular. So why hasn't this taken off; what's the holdup?

In order to understand what has gone wrong you have to understand the three core elements that need to be done right in order to create a massive O2O industry.

  1. The offer - Something that motivates consumers to make a purchase at an offline business.

  2. The Tracking - How the consumer redeems the offer and how the offline business tracks where it originated from.

  3. The Monetization - How online companies make money by driving consumers to offline businesses.
     

The Offer:

Groupon and LivingSocial almost cracked the code of O2O. They were so close you could taste it, and boy did the copy cats come out in droves. The fact that Google, Facebook, Amazon, Yelp and thousands of other online companies all started a daily deal website in the same year is unprecedented. The O2O gold rush had begun! You could smell the greed in the air, and it topped out with Groupon’s $20B public valuation just 3 years after launch, making Groupon the fastest growing business in history. But today Groupon is worth less than 10% of that value ($1.75 billion as of 1/10/16) and there is a graveyard full of failed daily deal sites. So what happened? They screwed up the offer.

Daily deal sites frequently used a 50% off offer. That motivated online consumers by the truckload but wasn't sustainable for the offline businesses. The offer has to walk a fine line of motivational for consumers and sustainable for businesses. Daily deals were like a "steroid" pumping up businesses fast but then leaving them with a small... um... number of returning customers. What actually works is an "exercise program", like a 10-20% offer that won't drive in as many consumers but will ensure the business has a sustainable marketing source.  

 

The Tracking:

Most tracking solutions to connect the online world to the offline world didn't gain traction because they have friction that prevents them from becoming ubiquitous. By friction, I mean anything that requires additional behaviors for either the online consumer (showing a coupon, scanning a QR code, checking in etc.) or the offline business (installing new hardware, modifying their POS system, or training their staff on a new app).

Daily deals had heavy friction in their tracking because they used the old fashioned coupon.  Even in a digital form, coupons have friction because the consumer has to show the coupon to the staff, which can get awkward on a business lunch or Tinder date. Coupons also require friction on the business owner's part to track the coupons and train staff how to redeem them.   

The reason this friction didn't stop daily deals is because the "juice was worth the squeeze".  Consumers and businesses alike will put up with friction as long as the reward is worth the pain the friction caused. The higher the reward, the more friction people will put up with. In the case of daily deals the promise of thousands of new customers was enough for businesses to deal with the hassle of coupons, and for consumers the 50% offer was so compelling that they didn't mind using a coupon. But once you bring the offer into a more sustainable place like 10-20% off, suddenly the friction needs to be less or consumers just won't bite.  

Thankfully there are new technologies and data emerging that can remove the friction. Here at Empyr we have formed a direct partnership with Visa, MasterCard, and American Express so the offline transaction can be tracked using what we all already use to pay, any debit or credit card. This makes it frictionless for both consumers and businesses. Adios friction!

 

The monetization:

The last piece is pretty simple, you need to create a way for online companies to make money by marketing offline offers. Daily deals monetization strategy paid out about 25% of the purchase price to the online company that marketed the offline offer. This was very compelling and is the reason why just about every consumer-facing internet company on the planet jumped into daily deals.

Here at Empyr we've created a similar monetization opportunity for O2O except this time the revenue share is more sustainable. The way it works is simple; offline businesses share a portion of the revenue they generate from a sale (usually around 10%) with the online company that drove in that sale. It's a Pay Per Sale model for offline businesses and it's a big revenue generator for the online companies because they make money on every offline purchase.  Unlike daily deals, Empyr offers are always on, so the online companies that promote these offers make less than a daily deal in the short term but more in the long term, again like an exercise program rather than a steroid.

So just how big is this monetization opportunity?  According to the US Chamber of Commerce, 93% of all commerce is offline, or $4.5 trillion dollars per year.

 

The formula

In summary, the formula for a trillion dollar O2O industry is:

  1. A compelling offer for consumers that is sustainable for businesses, such as 10-20%

  2. A frictionless way to track the offline purchases, such as using credit/debit card tracking

  3. A huge monetization opportunity to attract online companies who promote the offers

In a nutshell this is what we do at Empyr and why the time is finally here to build a large, sustainable online to offline industry.

 

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