From Amazon to Uber: e-commerce vs app commerce
This is the first blog in a 2-part series on the rise of app commerce, authored by Judopay’s CEO Dennis Jones.
Since the release of the iPhone 2.0 in 2008 and with it the dawn of the App Store, the promises of app commerce have spawned hundreds of businesses, attracted billions in venture investment, and provided great fodder for business predictions from many, including myself. We’ve noted that distributed computing power has the capacity to fundamentally change the way we engage in commerce — that moving decision-making closer to consumer impulse will lead to more sales. Now we’re seeing that the way to do this lies within the super computers we call the smartphones in our pockets.
But I am not speaking of mobile (or m-) commerce, but of app commerce — because it is apps that have the power to truly change not only the path to purchase but also how businesses interact with their most loyal customers. Apps are to websites what Excel is to Google Docs — faster, more powerful and fit for purpose. Google Docs works well for basic interaction, but for the moderate to heavy user (aka the loyal customer), the Excel software wins hands down. Indeed, many businesses have succeeded specifically because of apps (think Uber in ground transportation), and many more have been strengthened their brands (Starbucks with its pre-order and loyalty app).
With the growth in apps, the promise of disappearing lines is becoming reality (Starbucks again) and booking and paying for a flight is often easier through an airline’s app than on its website. And when consumers discover a better, easier, faster way, they vote with their feet (or fingers in this case).
But how did we reach this critical point? In order to realise the full potential of app commerce head on, it’s important to take a step into the past and see what we can glean from the history of e-commerce.
The dawn of e-commerce
1994 brought us the first e-commerce transaction in the US. By 1997, Amazon clocked up $150M in revenue and the dot.com boom was in full effect. Two years on and Amazon hit revenues of $1B and went on to successfully survive the dot.com bust. One of the key reasons Amazon was successful sounds like a reason for failure today — the homepage loaded in 8 seconds. Amazon was the trailblazer of e-commerce, the standards setter, the consumer experience trainer.
In this first phase of e-commerce market development, using Rogers’ Diffusion of Innovation framework, the brave consumers were Innovators — people comfortable with technology — younger than average, many living in or near Silicon Valley, who took the early plunges of buying things online. Like all innovators, they were willing to take more risks than the average person.
The Innovators phase was dominated by technology start-ups, while few if any established businesses took note of the threat at their doorsteps. We then went through a period running loosely from 1999 to 2005 where e-commerce became more ubiquitous. Amazon’s revenue hit $8.5B in 2005, moving the company swiftly from the experimental Innovators stage to the Early Adopters, a group five times the size but still less than a sixth of the total population. Now, businesses were opening their eyes to both the threat and the opportunity.
E-commerce becomes cool
The Early Adopters were satisfying their needs and coming back for more. They showed their friends how easy it was. They talked about buying things from Amazon at dinner parties. E-commerce became cool. Critically, even though the portion of commerce taking place on the internet was still tiny, consumers were being trained on what to expect, such as the form factors to enter your payment information and the time expected to go from one page to another. The satisfaction of getting what you wanted, delivered to your door, overcame some of the early challenges of engaging in e-commerce.
At the same time that Early Adopters were accelerating the growth of e-commerce in the US, the UK and Europe weren’t seeing the same adoption. While penetration was 16% in the US, the UK was below 5% in 2000 and continued to shun e-commerce through 2005. A paper co-written by Oxford and Cambridge economists boldly stated that the UK consumer would never feel comfortable entering their financial details on a website and declared that e-commerce was dead in the UK. How wrong they were.
The tipping point
2005 proved to be the tipping point for e-commerce in the US, unleashing an unstoppable migration of commerce from the physical world to the digital world as the Early Majority got on board. Amazon’s revenues climbed to $61B by 2012 and held its share of US e-commerce about steady. This group drove an 8X increase in the market size. The Early Majority, when compelled, are the drivers of change. When they are on board, the direction is set.
By 2012, with the Late Majority getting over their stubbornness, e-commerce started to mature. Transacting online was commonplace if not a requirement for retail businesses. Meanwhile, the UK economy moved to being more e-commerce intensive than the US and the rest of Europe followed suit. The Late Majority drove Amazon’s revenue to $107B by 2015, another 2X from 2012.
Today, the e-commerce market is well above $1.7T and a vast majority of consumers in western economies have conducted an e-commerce transaction in the past 12 months, putting us into the Laggards stage of consumer adoption. The industry is now officially mature.
So where is app commerce in the adoption cycle?
Much like Amazon trail blazed innovation diffusion for e-commerce, Uber is leading the charge in-app commerce.
Uber revolutionized the ground transportation market in two ways:
1) It simplified the matching of supply and demand, a particularly acute problem in the US market
2) It made the friction of paying for a ride from A to B disappear.
Uber launched their app in the Bay Area in beta in 2010 before fully launching in 2011 and rapidly chasing market share in the US and then globally. From the opening of the App Store in 2008 to Uber hitting $1B in revenue in 2013 (similar to Amazon’s revenue in 1999), the Innovators took about the same amount of time to experiment, fine-tune the experience, and begin to share their magical moments with their friends as the e-commerce market did (loosely five years each). During this time, Braintree (est. 2007) focused more and more on payment tools for apps just like CyberSource did for e-commerce during the Innovators phase. Most of the customers for emerging payment solutions were the start-ups that were first movers in building the majority of high-quality commerce apps (e.g. Uber). In 2012, I founded Judopay in the UK to focus exclusively on in-app payments and security to get ahead of the curve.
The Early Adopters were quick to take note of the power of apps and shifted their behaviour at lightning speed. Smartphone penetration rapidly neared ubiquity. Between Uber and an equally successful Starbucks, magical moments were beginning to appear everywhere, featuring at dinner party conversations and Uber eventually became a verb. By 2015, Uber hit $6B in revenue and closed out the US Early Adopter phase in record time. From seven years to two, app commerce has moved through this diffusion phase at exceptional speed.
The next few years will see explosive growth in app commerce: 2016 is the start of the Early Majority phase.
The evidence is clear that we have ‘crossed the chasm’ from Innovators to the Early Majority. 55% of American consumers with a smartphone and a debit card have engaged in-app commerce in the 12 months to June 2016, up from 23% in mid-2015 (First Annapolis). Starbucks has over 20% of transactions passing through its apps. Chick-fil-A was the number one app in Apple’s app store for weeks. Dominos has gained a significant competitive edge over arch rival Pizza Hut because of their leadership in-app commerce. Dunkin’ Donuts chased after Starbucks with mobile ordering from the start. There seems to be a new taxi app launching in New York every month.
Remember the shift that the Early Majority shepherded in for e-commerce? We’re at that point in the US and the UK isn’t far behind. Businesses and service providers take note: history is repeating itself; app commerce is here, it is different from e-commerce and you don’t have much time to get it right, so do so or face the consequences.
Stay tuned for my next blog post where I explore the lessons learned from e-commerce and consider how we apply them to succeed in app commerce.
All the opinions presented here are solely my own. -@dennissjones