The Migration of Web Techniques to In-Store Retail Practices

Via ralphbijker on Flickr

Via ralphbijker on Flickr

Think about the companies doing the most technologically advanced stuff. Amazon. Google.

Grocery stores.

Say what…? The place where oranges sit in piles in the produce section. Boxes of cereal lines the aisles. The frigid ice cream aisle.

Well, they’re not in the league of Google and Amazon. But grocers are more than those aisles of food and ceilings of fluorescent lights you see. Two trends in the industry borrow heavily from the advancements on the Web:

  1. Website optimization
  2. Recommendations

I’m not talking about monitors with web pages inside stores. I mean the shopping experience has been affected by these developments. Here’s how.

Website Optimization => Store Layout and Merchandising

E-commerce sites live and die by their conversion rates. A key piece of the conversion rate puzzle is effective navigation and presentation of items to site visitors. One company that helps with that is  Tealeaf, which records and analyzes visitor behavior to help site owners optimize conversions and return visits.

In a physical space, you can’t record people’s clicks and actions. Or can you?

As reported in a recent Economist article, retailers are starting to video record shoppers’ behavior in the aisles. For instance, here’s how one supermarket used technology provided VideoMining to understand visitor behavior in its juice section:

Another study in a supermarket some 12% of people spent 90 seconds looking at juices, studying the labels but not selecting any. In supermarket decision-making time, that is forever. This implies that shoppers are very interested in juices as a healthy alternative to carbonated drinks, but are not sure which to buy. So there is a lot of scope for persuasion.

These are exactly the kind of metrics that e-commerce sites track to improve their conversion rates. Use of cameras in-store to do the same thing is analogous to tracking visitors to your website.

Personalized Recommendations

Amazon.com really led the movement to provide effective recommendations to existing customers. One report I’ve seen says that Amazon derives 35% of its sales from these recommendations. Amazon’s recommendations are generated from your shopping history, compared to others via collaborative filtering. The success of these recommendations has inspired others to build recommendation engine services, including Aggregate Knowledge, Baynote, MyBuys, RichRelevance and others.

The same thing is happening in-store as well. You know that loyalty card you present to your grocer to get discounts? It’s used to record your shopping history. Historically, grocers have done little with that information. It was more of a device to keep you coming back to the store.

But in the past few years, grocers have been getting hip to the idea that their customers’ shopping history can be used to personalize the shopping experience.

Once, I was product manager for just such a system, called SmartShop. Pay By Touch’s SmartShop used a Bayesian model to compare your purchases against those of other shoppers, and determine whether you exhibited stronger or weaker preferences for a category or product than the overall average. A set of 10 personalized item discounts were then selected for you based on your specific purchase preferences.

On a website, returning customers are presented with a set of recommendations as they shop. In-store, what’s the analog? Kiosks. Kiosks are the in-store interaction basis with customers. SmartShop notified you of discounts via a print-out from a kiosk at the front of the store. This was key – get you the discounts right at the point of decision, when you’re shopping. Not unlike e-commerce recommendations.

Prior to Pay By Touch’s demise, SmartShop was getting good traction among grocers, who were looking for ways to increase basket size, increase loyalty and differentiate themselves. And it wasn’t just SmartShop. Price Chopper and Ukrops use a recommendation system from Entry Point Communications. UK-based Tesco is the granddaddy of personalized recommendations, provided through Dunnhumby.

Teaching Old Dogs New Tricks

While e-commerce benefits from being all-digital and various identification mechanisms, grocery historically lacked these. But that’s changing. Retailer have picked up the best practices of their online brethren. Things are now much more measurable and personalization is no longer the province of the online players.

Looking forward to grocers introducing Twitter into the shopping experience…

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For reference, here’s a white paper I wrote about SmartShop when I was at Pay By Touch:

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My Ten Favorite Tweets – Week Ending 121208

From the home office in Charlottesville, VA…

#1: “If you’re not blogging, you’re an idiot” – Tom Peters http://bit.ly/toNh >> Perhaps overstating it a tiny bit…

#2: Reading: Will Enterprise 2.0 ever enter big organizations? http://bit.ly/9QkK Well-articulated point re: cogs v. valu of complete individual

#3: So interesting that corporations are creating social media guidelines for employees. Intel is the latest: http://bit.ly/I3Pj

#4: Working on a kindergarten application essay. Yes, a kindergarten essay. Not something my parents had to worry about when I was a kid.

#5: Observation: if u wait to blog about a big Google announcement til the next day, your post is at the top of the Google post links = traffic.

#6: @problogger Thanks for the tweet of my blog post. Glad you like it.

#7: Reading: How ‘visionary’ raised – and lost – a fortune http://bit.ly/HiPc Great article re: my old employer Pay By Touch. Drugs, crimes, $$$

#8: Consequence of listening to Last.fm. Song I like comes on here at Specialty’s, I want to favorite it. I click around in the air instead…

#9: My preso, “Double the Value of Your Social Software”, was added to the Social Media Leadership group on SlideShare: http://bit.ly/tUaD

#10: Following @SantaClaus25 who is following more than he is followed. Guess he needs to track who’s naughty and nice…

Stick-To-It-Ness Pays: Rapt To Be Acquired by Microsoft

Rapt Inc. is being acquired by Microsoft, as reported over at TechCrunch by Erick Schonfeld. Rapt is an online ad optimization application, which fits Microsoft’s continued push into more and better advertising solutions. Rapt is also a great case of stick-to-it-ness. By that, I mean keep working at figuring what will make your business successful, and survive long enough to get there.

But let’s back up for a second. To greatly simplify things, one can say there are three types of outcomes for venture capital funded companies:

  • Supernova: legendary companies (Google, Microsoft, Amazon.com)
  • Moderate: cash flow positive (Rapt, SquareTrade, ebates)
  • Flameouts: bust (Pets.com, Webvan, Pay By Touch)

There’s plenty of press for supernovas and flameouts. But not so much for the moderate successes. The moderate successes represent a fairly broad range of outcomes. But they are an interesting study in starting a company, getting to profitability, and having the option what to do next. The three companies above – Rapt, SquareTrade, ebates – are each Web 1.0 holdovers who continue to be successes in today’s Web 2.0 world.

Rapt Inc.

Founded in 1998, Rapt started out life as some sort of procurement optimization provider for manufacturing companies. Here’s how their product Rapt Buy was described in 2001: Rapt Buy is a web-based application that gives companies real-time intelligence to optimize the procurement of strategic goods.

So the company was in the optimization game, but pretty far away from applying that to online advertising. But read what the company described itself as in that same 2001 press release: Rapt Inc. is a leading provider of software and services for enabling real-time, risk-optimized buying and selling decisions in complex business environments, and internet marketplaces.

Somewhere in there is the kernel of Rapt’s transformation from procurement of strategic goods to online ad optimization solution. I don’t know the success of Rapt’s original model, but they stuck with things and found a good market to apply their strengths. They came out with a series of products that enabled web media companies to optimize ad inventories. A March 2005 press release talks about Rapt being used by MSN to improve pricing for online ads. Subsequent client wins included iVillage, Yahoo, Tacoda, CNET and others.

Rapt did raise $55mm, so it needed a lot of capital to get where it is today. But by persevering through different markets and products, Rapt won many marquee clients and an acquisition offer from Microsoft.

SquareTrade

SquareTrade was started in 1999. Its original purpose was to be a mediator for disputes among buyers and sellers on eBay. The company received $9 million in VC funding back in 2000, and it hasn’t taken anymore since then.

The mediation services clearly paid the bills early on. SquareTrade also offers an eBay Seal, which tells potential buyers that a merchant has been reviewed and approved according to SquareTrade’s standards. Again, a nice little money maker for SquareTrade.

The absence of any new VC funding since 2000 tells you that the company is cash flow positive. Which is a nice place to be for SquareTrade. The company could live off the success of its model and dividend out the excess cash to investors and other shareholders. That’s something a lot of traditional, offline companies have done for years.

But you could view that cash flow in a different way. Your own source of “VC money”. Figure out new business lines, and self-fund their rollout. Forget the VCs. What a great option to have.

And that’s exactly what SquareTrade is doing. They’re trying to establish themselves as the largest independent warrany provider. Basically, sell the SquareTrade brand for warranties. I don’t know how they’ll do, but their established cash flow is going to give them the chance to stick-it-out and make a run of it.

ebates

ebates was established in 1998 by San Mateo County prosecutors. Huh? Well, what they created has lasted for quite a while. ebates gives consumers cash back on their purchases with 800+ online retailers. Basically, you just launch your shopping trip via ebates.com, and your purchase info will automatically be captured and your rebate calculated.

It was cool idea in 1998, and this is essentially the same thing ebates does today. Something like 1 million consumers are active on the ebates site. The company raised a $25 million round in 2000, and nothing else since then.

ebates is in a similar position to SquareTrade. Cash flow positive, and able to try new things. So far, ebates seems to be sticking with its 1998 model. More execution around its core model: more retailers, more consumers. Perhaps there’s something big brewing over there. But maybe not – they just enjoy the cash.

In Conclusion

The tech superstars garner the most press and certainly have the largest influence on the tech and business landscape. But the next level down, the cash flow positive moderate successes, do have some interesting things going on. Some keep hustling to position themselves for the next big thing, others enjoy the fruits of past labors.

Keep an eye on them, their cash flow gives them options.

Farewell, Pay By Touch, Farewell

Pay By Touch has come to the end of the road. In a press release issued today, the company said it was ceasing all remaining biometric operations:

Solidus Networks, Inc., DBA Pay By Touch, regretfully announced today that it will no longer process biometric transactions on behalf of its merchant customers and consumer membership base, as of 11:59:59 pm March 19, 2008.

 

Alas, this is no surprise. The company was overextended, and bankruptcy is a terrible position for a start-up trying to right the ship. The employees and new management brought in gave it a valiant effort.

A few post-mortem observations about the company are in order.

Consumer Adoption of Biometrics

It’s tempting to consider biometrics a loser in the consumer space. Ben Worthen at the Wall Street Journal does a nice job talking about biometrics’ value as well as its shortcomings. Biometrics is very sci-fi. And yes, it is too spooky for a large percentage of people. Inside Pay By Touch, we found there were two types of people who wouldn’t sign up: those who were concerned about privacy, and those who were against it on religious grounds (mark of the beast). If you follow Crossing the Chasm theory, there was also the mainstream part of population that would wait to adopt.

But there were early adopters. Pay By Touch processed several hundred thousand biometric transactions per month. Now in the grand scheme of things, those numbers pale in comparison to the volumes processed by Visa, MasterCard, American Express and the overall number of transactions occurring at grocery stores. But processing several million transactions over the course of the year is nothing to sneeze at. It shows that consumers were indeed willing to use biometrics for adoption.

I do think the adoption curve for biometrics is longer than for, say Twitter or RFID-enabled credit cards.

Economics of Biometrics

Biometrics requires both hardware and software. The hardware is pricey, and it does need to be replaced periodically. One thing about the field is that vendors continually innovate. Hardware gets more durable and reliable, and prices do come down. I had the chance to test different vendors’ new biometric readers. A lot of effort is being put into biometrics out there. I remember one of my favorites during testing was actually from Casio. It performed well, and brought back childhood memories of my wristwatches.

But the cost of installing and replacing the biometric readers is an issue.

Installing in the grocery lanes also took money. Each lane in each store had to be outfitted. Pay By Touch had to be ready for the different POS versions the stores were running: IBM, NCR or Retalix. Always with some different configuration or customization.

Pay By Touch’s biggest play for grocers was shifting consumers to ACH. ACH is much cheaper than PIN debit, signature debit or credit cards. So, of course, Pay By Touch couldn’t charge too much per transaction. This meant that operational costs needed to be kept low, the company kept small and lean. This didn’t happen, of course.

Level of Certainty in Authentication

Pay By Touch was very focused on a high degree of confidence in its authentication of each consumer, each transaction. There are two measures for how the biometric authentication performed: false rejects and false accepts. False rejects were cases where the consumer was legitimately trying to authenticate, but the system rejected him. False accepts were cases where the system wrongly identified a consumer as someone else.

The company’s bias was to avoid false accepts. One false accept could become a major news story undermining confidence of consumers in using Pay By Touch. And the system was quite good at avoiding false accepts.

The focus on avoiding misidentification meant that false rejects ran higher. False rejects were more acceptable – no one’s checking account would be wrongly debited. Early on, the company had a bad problem with false rejects. But a lot of work reduced that number significantly to a barely noticeable level. And that was important. Too many false rejects also undermine consumers’ confidence in the system: “Oh that fingerprint payment system never works.”

A lot of time was spent improving biometric authentication at the in-store hardware level, in-store software level and the hosted server level.

What Would Have Been Better for Pay By Touch

Hindsight is always 20/20. But it’s clear the gobs of money raised and multiple business lines hurt the company. Pay By Touch really needed to be run as a small company for a while. Keep the focus simple – ACH payments in multi-lane grocery stores. The company would have run in the red for a while, and needed infusions of funding. But it would have time to work through the operational levers and to bring costs down. Work in concert with the grocers to shift consumers toward ACH usage (e.g. better product discounts for ACH users; higher discounts funded through CPGs’ trade promotion dollars).

Expansion into other areas would come after prudent consideration of what was needed to succeed. One good, but admittedly tough example: provide grocers with lower credit card interchange for biometrics than for mag strip cards due to lower loss from fraud.

Also, this is a company that really could have used the guidance of a traditional VC firm. The hedge fund investors ultimately were little more than silent money. Still not sure why hedge funds parked money in an illiquid, high risk start-up.

It’s Over

So now the remaining Pay By Touch employees are left to find new jobs. Creditors won’t see much of what they’re owed. Merchants have to tear all that hardware and software out of their stores.

But Pay By Touch’s acquired division S&H Solutions will carry on (independently or as part of some other company). It’s got a strong loyalty marketing business and some momentum from SmartShop implementations. And the biometric check cashing business, formerly Biopay, lives on as Phoenix Check Cashing. Good luck Jon Dorsey.

And someday, some start-up might try to do mainstream consumer biometrics again.

I’m @bhc3 on Twitter.

Welcome to My ‘Peanut Butter’ Visitors

WordPress provides some nice basic stats about activity on your blog. Total number of visits, specific posts clicked, referring websites and search engine terms that caused someone to arrive to your blog.

A couple of days ago, I noticed a significant uptick in visitors clicking on the post, Pay By Touch & the Peanut Butter Manifesto. They seemed to be arriving from the search term “peanut butter”.

Now, I don’t want to dismiss the possibility that these visitors were really interested in my post. The post uses a Yahoo executive’s exasperated email comparing Yahoo’s efforts to spreading peanut butter too thin, and applies that to Pay By Touch’s situation. All well and good.

But I’m not quite sure that’s what my “peanut butter visitors” were looking for. In fact, I’m not sure what they’re looking for. I didn’t realize there that many people searching for information on peanut butter every day.

And the other confounding thing. What search engine are they using? I’ve tried to search for “peanut butter” on Google, Yahoo, MSN and Ask. The post doesn’t show up anywhere in the top 100 results.

So if one of my peanut butter visitors happens to read this post, please leave a comment. Tell me what search engine you’re using, and why you clicked on my blog post for “peanut butter”.

Pay By Touch and The Peanut Butter Manifesto

In November 2006, Yahoo executive Brad Garlinghouse’s email to senior management was leaked to the Wall Street Journal, and subsequently picked up by bloggers. In the so called “Peanut Butter Manifesto”, Garlinghouse decried the “lack a focused, cohesive vision for our company”. The email takes the company to task for having too many initiatives, and for failing to integrate various acquisitions. The money quote:

“I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.”

In light of Microsoft’s bid for Yahoo, the Peanut Butter Manifesto continues to resonate as an issue for the company. Which brings me to Pay By Touch.

Pay By touch raised a lot of money, a whole lot. And Pay By Touch went after “myriad opportunities”. Here’s a list that I am drawing from memory:

  1. Biometric authentication
  2. ACH payments
  3. Credit card processing
  4. Personalized marketing
  5. Healthcare
  6. Online authentication
  7. Online debit payment
  8. Loyalty card management
  9. Financial institutions
  10. Government
  11. Paycheck authentication

The above are verticals. There were also channel-specific efforts as well: multi-lane retail, single-lane retail, international. So there was a lot going on.

The problem with any Peanut Butter Manifesto company is that:

  • Engineering cannot satisfy all the requirements needed for the initiatives
  • The ability to focus on one area, try things out, make mistakes, correct and iterate is drastically diminished, which kills an emerging technology company
  • Senior management cannot focus attention on the various initiatives for funding, sales and strategic moves

One might wonder how Google pulls it off. They certainly are into a lot of things. Here’s the secret: they absolutely own a market (search & ads) that prints money for them. They then get the luxury of trying different things. Microsoft has the same thing with its Windows and Office franchises. GE owned…light bulbs? Well they owned something a long time ago.

So let’s look at these two Peanut Butter companies. Yahoo is subject to a hostile bid. Pay By Touch is in bankruptcy.

As Garlinghouse stated at the end of his email: “stop eating peanut butter.”