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Summary:

A big factor in the $75-billion theoretical market value Facebook has amassed is the idea that the social network will become a major e-commerce player. But a new report from Forrester Research argues that Facebook may never actually achieve that goal for a number of reasons.

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A big part of what Facebook sees as its future — and a big justification for the $75-billion market value the company is theoretically being given — is the idea that the giant social network will become an e-commerce powerhouse, producing billions in revenue from retailers and major brands. But is that realistic? One analyst says no. In fact, Forrester Research’s Sucharita Mulpuru says in a report released Thursday that when it comes to e-commerce and driving substantial amounts of business-to-consumer revenue, Facebook may already be as big a player as it’s ever going to get.

According to Mulpuru, who surveyed dozens of retailers large and small about their use (and/or their lack of use) of Facebook as a retail sales channel, “while pockets of opportunity for Facebook do exist, the likelihood that Facebook will ever be ‘the next Google,’ thereby becoming a key sales-driving tool for retailers and creating a reliable revenue stream for Facebook, is unfortunately far-fetched.” Why? The Forrester analyst says that Facebook-based stores are largely ineffective, especially for larger retailers, and that click-through rates are also anemic. In a nutshell, the analyst says:

In spite of the fact that hundreds of millions of people around the world have Facebook accounts, the ability of the social network to drive revenue for eCommerce businesses continues to remain elusive. eBusiness professionals in retail collectively report little direct or indirect benefit from Facebook, and social networks overall trail far behind other customer acquisition and retention tactics like paid search and email in generating a return on investment.

The report’s findings show most retailers are still just experimenting — in some cases because they feel that they should — and social networks still rank dead last in customer-acquisition tactics, with 7 percent of those surveyed saying they use them, compared with 90 percent for search-engine marketing. According to the retailers Forrester talked to, social networks are barely any more effective than run-of-the-mill banner advertising, in part because click-through rates are low (1 percent, compared with a click-through rate of about 11 percent for email marketing). Facebook stores also don’t perform well, and some retailers say the network tries to push retailers towards banner ads instead.

Taking advantage of Facebook’s open graph — through “like” buttons but also the sharing of shopping activity with one’s network, etc. — is useful, but is really only effective when there is a large enough network of users doing this, says Forrester. This fact “ultimately renders the Open Graph (and the specific value of Facebook) inadequate for all but the very large companies” such as Amazon. And while companies can get a lot of data from Facebook about customer interaction, comments, behavior and so forth, Mulpuru says that “the unstructured nature of data from social networks… makes it difficult for even the most sophisticated natural language processing tools to shape meaningful conclusions.” In other words, there’s lots of data but it’s not very useful.

Forrester says there are many who benefit from Facebook — including “small, pure plays” for whom Facebook is like “the 2011 version of Yahoo Merchant Solutions or eBay ProStores,” in that it allows anyone selling something to set up shop and market themselves relatively quickly. These kinds of enterprises, as well as local and community-based companies, often benefit the most from the word-of-mouth advertising that social networks specialize in. Other things that work well are categories that have a tendency to “go viral,” such as movies or books and other forms of digital entertainment, anything that sells well in a peer-to-peer marketplace (in which Facebook effectively competes with Craigslist) and of course anything related to online gaming.

Mulpuru says that the challenges for Facebook include:

  • making Facebook stores more effective (Forrester says they currently generate less than 1 percent of e-commerce revenue for retailers with “robust web businesses”)
  • competing with Google in search: while Google matches shoppers’ needs with specific products and stores, Facebook is more of a directory or a communications tool, and therefore less successful
  • making payments work: Facebook Credits has potential, says Forrester, but payment systems are complex and many retailers have yet to even adopt PayPal, which is much more mature
  • showing that it cares about privacy: Forrester says that many retailers are concerned by what they see as a “reputation for apathy around privacy issues.”

It could be that Facebook as an e-commerce platform is such a new thing that the industry has yet to grasp how effective it can be. But if Mulpuru is right in her analysis, one of two things will have to happen: either advertisers and major corporations have to change the way they are using Facebook — and see some kind of return on the experiments they have so far been conducting — or the dreams that Facebook will become a major player in business-to-consumer retail will have to be revised. And if it’s the latter, then some of those $75-billion theoretical dollars the company is worth will have to go away.

Post and thumbnail photos courtesy of Flickr user Zach Supancic

  1. Facebook is an entertainment powerhouse, because that’s what people do with their friends: have fun (i.e. play games). Maybe they should focus on that. Commerce and business is not a thing you need friends to do.

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  2. While the conclusions may be valid, and I haven’t read the full report, this quote makes me wonder a little about the analysis: “the unstructured nature of data from social networks makes it difficult for even the most sophisticated natural language processing tools to shape meaningful conclusions.”

    Natural language processing is currently primarily applied in things like interpreting search requests. It is typically not used in general e-commerce applications; rather, behavioral information such as accesses, “like” button, etc., are/will be used, and there is a lot of this kind of information available in FB. So I don’t see the “unstructured” nature of FB information being a problem, although, as I said, her other points may make sense. In fact, in the future there will be an opportunity to mine more meaning directly from people’s writings in FB (better called semantic/Bayesian inferencing, etc., than natural language processing. This is indeed a much harder problem, but a good problem to have for FB, since they will have by far more text to mine and make inferences from than any other conceivable platform.

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    1. Agreed! I’m pretty sure all of those singles sites in the sidebar aren’t getting at what I want. Seriously, look at my friends, links, and likes.

      I also feel that Facebook should be creating more of a market, ala iTunes, rather than trying to own it all. Take a percentage. Go high value like Groupon. Partner with pro upon and share (70/30). It is silly for that everybody feels they have to own it all.

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  3. LOL. This guy is going to have a rude awakening soon. Facebook is primed to explode in driving e-commerce. They haven’t released any products that speak directly to driving sales yet? Wait, until they do… then do a report. This will look dumb 1-2 years from now.

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    1. Thanks, John — Sucharita is a woman, but your point is well taken nonetheless. Thanks for the comment.

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  4. Have you heard about Fcommerce? There is Ecommerce and Mcommerce and the latest trend is Fcommerce or Facebook Commerce spelt out. What about the Facebook mall and the facts surrounding the success of brands that transact with fans and their networks on the site? The impact of a ‘like’ is not disputed (http://www.zmags.com/blog/facebook-like-ecommerce ) so I would take a guess that Facebook will try to find a way to connect the action and visibility of ‘liking’ a product to getting the network to complete a transaction as well. The very premise of Facebook is to keep people on their site so I just dont see anyway they would avoid an opportunity like enabling brands to setup successful commerce pages that do just that. Its also mobile and for commerce companies that are still trying to figure out the best way to reach mobile shoppers, using social media sites as a gateway may be the answer.

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  5. i think this is a view that is very constrained by the realities of what facebook is today and not what it can be. i wouldn’t be surprised if someone told me that facebook currently has in its labs a version designed as a replacement for brand websites. its current version has all the key components of a corp website (ecommerce, advertising, information and profile on the brand, obviously social components, sharing, customer feedback, content of all kinds, etc.). So why can’t they evolve to the point that it can be seen as a replacement of a brand’s website and by extension ecommerce platform? There are of course the privacy issues that it needs to address before any corporation can trust it, but they too can be overcome if FB is ever serious about this.

    If FB and the brands aren’t there yet mentally, the market trends will drive them there. To list a few:
    >>Facebook users are far more inclined to interact with the brand on FB (“like”) than its website (Coca-Cola, 20.5 million likes to 270,000 site visitors; similar trend for Starbucks adn other large brands).
    >>A generation that is increasing and exclusively making its web destination FB.

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  6. Great stuff – because I’m frankly sick of Facebook and their valuations based on the uncertain future that they will be able to turn their data into something meaningful. Data warehouse? No, I think more like a data garage.

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  7. I don’t know a single person who would feel comfortable giving facebook their credit card number.

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  8. The key value of Facebook is not having e-com retailers setup a storefront within Facebook, which as other comments note is more about socializing and entertainment, but rather that _when_ shopping anywhere having your most intimate friends (another challenge for facebook: intimacy) and their opinions are available. The fact that the Facebook platform can provide some support to socializing online shopping in the same way that teens (or other groups) socialize at the mall today is where the opportunity is in my opinion. I think the platform play still stands… but it isn’t clear yet how exactly this will look like. Consumers sharing data about shopping is only one step in a larger conversation, and brands won’t be the ones initiating it, but rather listening and promoting it. (Maybe Chat, SMSs or emails are the back channel.)

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  9. It’s hard to tell if this is a replay of the early web and the very slow adoption of retailers (who still aren’t on PayPal) or if this is a consumer behavior. Consumers tend to pour concrete around companies once they’ve interacted with them. Google is search. Apple is an electronics company. Facebook is a social network. I believe the question is whether or not, shopping/buying is seen as a social activity for enough people that buying on Facebook is a natural thing to do. It’s easy to envision certain demographics embracing the concept and then for others it’s more difficult.

    I do believe in the two forms of social commerce that exist today (http://www.cruc.es/2010/12/06/the-2-flavors-of-social-commerce/) and think that Facebook should focus on building out both flavors of social commerce.

    As for direct ecommerce on the Facebook; time will tell.

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  10. good article, but my last name is Zupancic, not Supancic

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