Is Distributed Commerce About to Have its Moment?
TikTok shopping is a great example of “Distributed Commerce’’ and it seems to be gaining traction in a way that previous efforts have not (more on those below). While it is too early to tell if its momentum will continue, we suspect that recent advances in AI might be the key to making distributed commerce live up to the hype. If AI can really identify the exact right product at the point of inspiration (which it seems to be doing more effectively every day), shoppers may not ever need to visit a shop to make a purchase.
First…What is Distributed Commerce?
Distributed commerce is the concept of meeting customers where they are and allowing shoppers to buy at the point of inspiration rather than forcing them to purchase only on a traditional e-Commerce website or by visiting a physical storefront. Fundamentally, distributed commerce lowers conversion friction by minimizing steps in the journey to purchase.
But where exactly is the point of inspiration? Often it happens in places of community, discovery, and play. Visual artboards and social media communities like Pinterest, Instagram, and TikTok often motivate unexpected interest in the purchase of a product. Outside of traditional social media, other platforms including music apps (e.g. Spotify), video games (e.g. Roblox), and news media and publications can spur the desire to purchase related goods, both physical and digital.
Wait — Haven’t We Tried This In The Past??
Distributed commerce isn’t new conceptually, and after some false starts, appears to finally be regaining steam. Instagram launched a shopping feature way back in 2016 and others followed suit but ultimately shuttered those efforts after a year or two of effort. In the following years, Instagram’s attempt to integrate shopping as a core function in various attempts (shopping tab, through stories, live shopping, storefronts, etc). has been pointed to as a popular failure because it doesn’t make a significant difference for brands and underwhelms consumers with a lack of product information and reviews.
That being said, TikTok seems to be on to something with its launch of shopping features recently. Historically, one of the challenges with social media delivering successful distributed commerce experiences is the accuracy it needs to deliver. For example Instagram has proven its success at helping brands acquire new customers through targeted marketing. Distributed commerce and the ability to convert in app requires much more specificity and nuance. The app has to identify more than just what customers fit a specific brand’s target market — it has to surface the perfect one item that a customer would be likely to buy on the spot. And on top of that, it has to have integrations that pull in real-time from the retailer in order to verify that that particular item is actually in stock and able to be sold and shipped to the customer.
TikTok’s algorithm for surfacing relevant content and items has proven so well that hashtags like #tiktokmademebuyit are now the normal for social shopping. Consistently, TikTok is able to target customers with the exact perfect product that they are willing to buy. Capitalizing on this momentum, TikTok launched a Shop feature, which seems to be the only social player that has gained momentum within its own native app The company is currently doing run rate of over $1B in GMV on the platform annually (vs. an annual run rate of around $200M-$300M in June), and hopes to get to annual run rate of $3.5B by the end of 2023. As TikTok’s shopping gains momentum, we believe there is opportunity for other players to effectively utilize a distributed commerce model as well.
What is So Hard About Distributed Commerce?
As described briefly above, there are a number of technical and user experience challenges that have (and continue to make) distributed commerce hard to get right. These challenges include:
Accurately representing real-time inventory at the point of inspiration
While product images and descriptions are typically relatively static in nature and can be easily pulled into the point of discovery, maintaining real-time inventory availability is more complicated.
Some distributed commerce platforms are solving this by developing a direct relationship with brands and using APIs to pull in inventory data (hard to build the direct integrations), while others are solving this by scraping the brand’s website on an ongoing basis (easier to build, but harder to sustain reliably) to find inventory levels.
Conveying the “merchant of record” to the consumer
A merchant of record is the legal entity that is responsible for collecting payment, sales tax, ensuring PCI compliance, and handling refunds and chargebacks. The merchant of record is typically the name that shows up on a customer’s credit card, and where the customer believes he or she purchased the item from. Online shoppers are familiar with the merchant of record being the website they are shopping on — either the brand itself if the customer is shopping on the branded site (e.g. American Eagle, Gap, etc.), or a multi-brand retailer (e.g. Nordstrom, Net-a-Porter, etc.) When a customer buys from a distributed channel, however (e.g. within a video game, in a media or news article, or in a social media post), the identity of the “seller” is not always clear to the customer. For example, are they buying the product from an influencer who wrote the social media post, a media company that published the article, the video game that showcased the item, or a social media platform where the post was shared? Or are they buying from the brand who manufactured the product? If they need to return the product or have another customer service issue, who do they send it to? Conveying this to a consumer is hard, but is critical to the smooth running of distributed commerce.
Enabling a multi-merchant cart
One of the best benefits of distributed commerce is the ability for customers to purchase products from multiple different vendors in one cart/purchase. How companies that enable distributed commerce handle multi-merchant carts then becomes a new problem to solve. Does the company take one combined payment from the customer and then split that into several payments for each merchant in the back end? Does each merchant ship separately to the customer from their own warehouse, or are the orders somehow combined into one before shipping? This issue also relates to the merchant of record question, complicating things further.
Processing the Payment and Checkout
Lastly, how are the mechanics of the payment handled? Does the consumer go through a checkout flow facilitated by the social media site, the infrastructure provider, or the merchant itself? If the purchase isn’t made directly to the merchant, how are the funds remitted to that merchant? Does the remittance require a virtual credit card, and thus create a “double dip” on the payment processing fees for one transaction? Some startups have direct relationships with the merchants and can pass the credit card information through back-end systems, while others avoid direct relationships and use technology to automate entering credit card information into a merchant’s standard checkout flow.
If it is so hard, why is Commerce Ventures still bullish on distributed commerce?
We believe these factors could unlock the promise of distributed commerce.
- The Emergence of a Seamless Technology Platform: Companies like Rally and Violet are working hard to make the aforementioned mechanics of distributed commerce seamless to consumers, social media channels, and merchants.
- A New, Powerful Channel for Inspiration: We believe a new channel could emerge to make the value of the distributed commerce experience too hard to ignore. This could be the acceleration of video commerce, in-game commerce, or some entirely new medium or social channel.
- AI Dramatically Improves Targeting: As we discussed above, advances in AI may prove to be the unlock for distributed commerce. If AI can surface the right product better than consumers can find a product themselves by browsing a product catalog — we might not need “shops” at all!
While consumers will continue to purchase through traditional shopping channels, we expect to see more consumption at the point of discovery in the coming years.