How retailers and brand manufacturers will evolve through social e-commerce

One of the big shifts in online shopping last year was the emergence of e-commerce. Brands and retailers started to realize that social networks are a channel not just to extend reach, but to drive actual revenue.

The power of social e-commerce can be understood when you couple the fact that 90 percent of people trust recommendations of friends above any form of advertising with these statistics:

• U.S. Internet users spent 41.1 billion minutes on Facebook, surpassing Google 39.8 billion minutes for the first time (according to comScore).
• 1 in 4 minutes spent on the Internet in the US is spent on Facebook.
• Facebook has 500 million users, adding over 100 million in the past 7 months, and 50% of the active ones log on daily.

The infrastructure of the Internet now enables the sharing of information among networks at a velocity and scale that has been impossible in the offline world. Businesses must identify ways to leverage this dynamic to influence the purchasing process and to ultimately drive revenue. To that end, a plethora of social e-commerce solutions have hit the market and are evolving as quickly as the social networking phenomena.

To help bring some clarity to this trend, we can divide social e-commerce into three distinct phases: first, second and third generation social e-commerce.

• Phase one: Social distribution. The first phase of social e-commerce is defined by companies like Groupon, LivingSocial, or GiltGroup. They were the first to deploy retail models that leveraged the power of the social Web. These companies generate a viral distribution platform that help businesses drive sales, liquidate inventory and leverage the social web for marketing. These businesses will continue to have a critical role in social e-commerce but we expect businesses to adopt some of their tactics to work within their own customer networks.
• Phase two: Throwing money at social features. Brands and retailers with a critical mass of customers are realizing they can employ the same tactics within their own customer networks. They are experimenting with various social features, or point solutions, including but not limited to couponing, social shopping, private sales, social wish lists, reviews and ratings, Facebook shopping carts, badging, and more. These solutions add interesting social experiences and will be the subject of much focus in 2011. We talk to many retailers and brands that have conducted these experiments and they like the social aspects these features introduce, yet they realize they have limited if any at all integration with the most important data in e-commerce –- the customer transaction.
• Phase three: Social e-commerce platform: The third phase of social e-commerce solutions addresses the needs of progressive retailers and brands that are looking to optimize their customer networks to drive revenue. For example, if you are looking to incent your network to share a link to your product or service, you want to reward them not just for the number of times shared, but rather on the number of customers they have referred, the products they have rated and shared, the social coupons passed along, or the order volume and revenue driven. But if your badging software or referral tracking system has limited connection to couponing, ratings or reviews, the Facebook shopping cart, or your core e-commerce, how can this be managed? This is where a social e-commerce platform built from the ground up to be social, with comprehensive eCommerce functionality and the ability to work with existing commerce systems becomes critical.

Customer network optimization: The new SEO

Over the next five years, we expect customer network optimization to become as important as search engine optimization and search optimization has in the past 10. Looking back at the beginning of SEO there were rudimentary technologies, no best practices and very few experts, yet today more than $13 billion is spent annually on SEO services and $26 billion spent on paid search advertising.

Long-term success in customer network optimization lies in a comprehensive approach to the entire funnel from product consideration to purchase, and having a holistic, complete view of the influence value of a customer and their transactions. This requires a platform approach where companies can extend an integrated shopping experience into Facebook, other social networks or promotional sites, and centrally manage this channel with others in your e-commerce system. Social promotions, like badging, incentive programs, or private sales will be deployed in an intelligent manner, using all the critical customer and purchase history to truly optimize customer networks and activate them around products and services within social networks.

In 2011, we expect that all retailers and brands have a slice of their budget set aside to deploy social e-commerce. Some brands and retailers may continue to work with distribution platforms and point solutions as a way to amplify their offers. But we anticipate leading brands and retailers will want to retain control of the experience, test and optimize social promotions and merchandising, and refine their approach to a more comprehensive social e-commerce platform.

Matt Compton is chief executive at ShopIgniter, a provider of social e-commerce solutions. Prior to ShopIgniter, Matt was a venture partner at Madrona Ventures, an early stage technology venture investor, and he also spent several years at Yahoo.