go-Digital Blog on Digital Marketing

August 5, 1998. Contextual Commerce(tm): Content providing Context for Commerce

Author: Dr. Augustine Fou, go-Digital Internet Consulting Group, Inc.

What is the next “holy grail” of the Internet? Companies that are struggling to make money on the Internet are constantly looking for the next “big thing.” In this short article we take a completely contrarian perspective and hypothesize that the online consumer space is the target market and that advertising is not the right revenue model. We coin a new term, contextual commerce™, as the most effective use of the Internet medium for e-commerce, which stands for “everyday commerce” in this article.

In the evolution of the Internet, most companies have focused on the business-to-business space to date. Looking at the trends, however, the Internet has evolved from big government and universities to big companies and small companies; the next step is consumers, the atomic unit of society, accounting for every action, interaction, and transaction. Indeed, the size of the market opportunity is considerable. For 1998, Jupiter Communications estimates online consumer e-commerce in the U.S. to total $5.1 billion, consisting of travel, computer hardware, groceries, gifts/flowers, books, software, tickets, music, and clothing, in that order. International Data estimates that by 2000, 46 million American consumers will be buying online, spending an average of $350 each, making a $16 billion market. In the years thereafter, when e-commerce becomes “everyday commerce,” consumer retail will hit $2.7 trillion in the U.S. alone, with the online channel accounting for a larger and larger percentage of completed transactions. With such phenomenal growth, the consumer space is, without question, the next target market. The question then becomes, how do businesses capture revenues in a space where they have failed to do so thus far.

The advertising revenue model, which has been used pervasively to date, is fundamentally flawed and not sustainable in the Internet space. Historically, in traditional media such as print, television, and radio, the enormous cost of creating and distributing content were barriers to entry that allowed a small number of large companies to command advertising revenues from vendors wanting access to the consumers of this content. However, the technologies of the Internet drastically decreased the costs of distribution and proliferated free access to non-specialized content such as stock quotes, sport scores, news, weather, etc. In this new online world, companies that seek advertising revenues by providing generic content must spend enormous amounts of money to attract traffic to their site, for lack of any other differentiated advantage. Very seldom do their advertising revenues offset these costs, and rarely do consumers pay for such content. Even today’s “portal” sites (search engines) deliver “commoditized” content which all other search engines deliver, namely links to websites. Companies alternatively invest large amounts of money to create proprietary content, which is relevant for a niche audience. In this case, not only is creating content expensive, but the niche audience is necessarily smaller and therefore requires more expenditures in targeted advertising to attract them in the first place. Again, the advertising revenue model fails.

E-commerce has been the area of focus of many new companies, citing revenues from transactions as the new revenue model. However, e-commerce as we know it today suffers from many inefficiencies, delivers little to no additional value compared with traditional catalog or retail channels, and is burdened with privacy and security concerns of consumers who are unfamiliar with the medium. The inefficiencies arise when individual producers or vendors build expensive e-commerce websites and spend money on attracting consumers to their site, only to sell a few $15 CDs or books, occasionally. Also, multiple vendors are spending money to pull the same consumer to their non-specialized sites and competing on price which drives margins to zero for everyone. The speed and efficiency of information flow online make it impossible for anyone to arbitrage information asymmetry to make money, especially now with online shopping agents scouring the entire Internet for the lowest price across all vendors.

The lack of success of e-commerce to date is also due to the many “disconnects” in the way e-commerce happens today. There are spatial, temporal, and logical disconnects between the consumers arriving online and the potential transactions that they will generate. A spatial disconnect occurs when consumers have to click a banner ad and be taken to an entirely different website to peruse a standard catalog, find the item, and then purchase it. Second, temporal disconnects prevent companies from effectively capturing impulse buys. That is, after a consumer sees something he wants to buy, he has to go to the “store” section of the website, navigate through complex shopping cart systems, and fill out long forms before completing the transaction. Anecdotal evidence suggests that most consumers don’t ultimately make the purchase, citing frustration with the process. Finally, numerous studies confirm that consumers use the Internet to research product information prior to “considered purchases.” However, a logical disconnect occurs when he has to hunt down another website that actually sells the product he researched. All in all, it is still hard for consumers to find what they want and complete the purchase online; and it is hard for businesses to make money from transaction revenues using traditional e-commerce.

We hereby define a solution, contextual commerce™, which is the most efficient use of the Internet to deliver content that provides context for commerce. We define “commerce” broadly as the “exchange of value,” which includes the transaction of products, services, currency and information. Where online malls have failed and “traditional” e-commerce is inefficient, contextual commerce™ gives companies a sustainable business model that satisfies all parties’ needs and captures value from the transactions between producers, consumers, and content providers. Consumers’ top “want” is convenience. The efficiencies of this electronic channel enable the greatest convenience and personalization, compared with the broadcast media such as television, print, or radio. Suppliers want to reduce the costs of customer acquisition and distribution while increasing revenues by generating larger transactions with greater frequency. Contextual commerce™ eliminates duplication of spending, provides accurate targeting through understanding the consumers’ online lifestyles™, increases the probability of completing transactions, and provides unprecedented tracking because the entire sales cycle is closed-loop in the same medium. Finally, content providers seek new revenues for the content they produce. Contextual commerce™ allows content providers to be compensated for providing their content as the context for generating commerce.

An example of contextual commerce™ is as follows. While reading an article from Cosmopolitan magazine about planning a romantic dinner for Valentine’s Day, a consumer wants to buy flowers, chocolates, fine wine, gourmet foods, and even lingerie. These consuming habits would normally require him to go to a bricks-and-mortar mall, visit many different stores, and buy each item separately. However, the online lifestyle™ of this consumer can easily be satisfied by making all of these products available for purchase, in the context of the content which he is using. Other examples include allowing an outdoorsman plan a hiking trip and buy the perfect flannel shirt for the occasion or a teenager to buy a pager to go along with the new jeans. Contextual commerce™ fulfills the consuming lifestyles of individuals, in ways simply not feasible in the physical world. The online lifestyle of each consumer is no different from his daily lifestyle as a consumer.

In conclusion contextual commerce™ reduces the inefficiencies of e-commerce, provides a viable alternative the flawed advertising revenue model, and is a strong business case for companies aggressively pursuing the next “holy grail” of the Internet space, consumers.