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Author's profile photo AMIT AGRAWAL

What can Retailers learn from Software companies?

Marc Andreessen (remember Netscape!) has been known for a bold prediction or two. In a Wall Street Journal Op Ed in Aug 2011, he created waves by declaring that “software is eating the world”. What he meant was that vast swaths of the economy will be transformed, disrupted, and even taken over by software companies. Point well taken – especially for companies that deal in digital goods. But recently, he took it a step further by predicting that “software will eat retail” – that traditional retail will be dead in a decade. Yes, dead! For those of us associated with retail – this hits home – this is personal. I am sure we all have various and compelling reasons to believe why this would not happen. Marc nevertheless has a point.

That technology has a bigger and bigger role to play in retail is beyond question. Ecommerce is growing and whether it’s 100% of retail or 20% of retail in a decade – one thing is for certain –  software will transform retail in ways we don’t yet fully comprehend. This fact is not lost on most retailers, witness increased retailer spend on software and cutting-edge technologies. Many leading retailers are taking it a step further – trying to build more software capabilities internally– case in point @WalmartLabs, Home Depot’s acquisition of BlackLocus, Tesco’s investment in Dunnhumby.  

While it does not make sense for all retailers to emulate these moves, there are many things that retailers can learn from software companies nevertheless. A recent McKinsey article (“Competing in a digital world: four lessons from the software industry”) highlighted ways that thinking like a software company can help other industries. Here is what I think it means specifically for retailers.

  1. Software companies have long focused on a large and vibrant ecosystem to deliver value. That ecosystem extends from customers to suppliers of complementary products to (if it benefits the customer) even competitors in a co-opetition mode.  Similarly retailer thinking has to evolve from buying and selling of products to establishing a common set of objectives and platforms that can engage customers, suppliers, and even other retailers for greater benefit of everybody. An API (Application Programming Interface) is the common glue that sometimes tie software partners. What is the retail equivalent of that common glue? Is it massive amounts of data that a retailer has – sales data and customer data – that has the potential to provide value and better engage customers on one end and can be used to improve planning and be used as currency when collaborating/negotiating with suppliers on the other end? If you are a retailer you ought to be thinking about your ecosystem – do you have one  – what does it look like – how does it provide value to your customer – how can you expand it – how can it help you differentiate from your competitor ?
  2. Software companies increasingly rely on agile methodologies and fast iterative product cycles.  The first iteration of a software product may not be complete or perfect but it’s delivered with an acceptable functionality and then improved upon with customer use and feedback over time. Using power of social media, retailers, especially in fashion, are similarly starting to test concepts before they are launched. They are starting to put out ideas with the hope of launching only those that customers like and approve. As social media becomes more pervasive, shopping becomes a more collaborative social experience on the Internet, people become more and more impatient and want things yesterday, planning times shrink, retailers need to do more of this fast proto-typing to better engage customers, become more agile, avoid carrying inventory that customers do not want and increase their profit margins.
  3. Finally, retail business model has long relied on buying and selling products for a profit. That is akin to a software company only making money by licensing its application software. But over time, software companies have diversified revenue streams through alternate business models such as delivering software as a service and monetizing their platforms by opening them for other developers, partners, and even competitors.  Airlines recently followed a similar path where they diversified their revenues beyond just selling seats for travel. They priced basic product low to cater to value conscious consumer but found revenue in complementary services that customers value (an apparent contradiction that the same cost conscious consumer would pay 50 dollars for early boarding). While the same tactics may not work for retailers, the point is to think of your revenue model more broadly and see how business model can evolve to capture more value. Is there “Software as a Service” equivalent for retail? How does the store economics and business model need to change so that a physical store is not just a showroom – and if it ends up being that way – who pays for it? Could we make a business by monetizing customer data, monetizing our web properties, monetizing mobile app? Some of this is already happening to some extent. It however needs to become a way of thinking to continuously explore new sources of revenue

Retailers traditionally have not been at the cutting edge of technology. Now is the time to change that – by not only ramping up your investments in software and technology – but to start thinking like a software enterprise yourselves. In my view, Marc Adreessen is way-off in predicting the demise of traditional retail. But there is no denying the fact that more and more Internet-only retailers will emerge and increasingly win race for consumer’s attention and dollars. The key for retailers lie in acknowledging the increased inter-connectedness of software and retail, learn from the software world, and lead the way in shaping the retail-landscape of tomorrow. If software were to eat retail (and to some extent it will), it may very well be your software rather than your competitor’s.

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      Author's profile photo Mohamed Amer
      Mohamed Amer


      Thanks for such a well thought out blog. 

      I think the operative word for Marc Andreessen is "traditional" retail.  Innovations in business and technology are hitting retail like a relentless category 5 storm. And customers are riding in behind it expecting a brand new world of choices, convenience, and personalization.  It's a brave new world. 

      Successful retailers will be those that rise (with their ecosystem) to these challenges by seeing the opportunities ahead and transforming themselves and the industry like never before.  I'd much rather be creating the future than reacting to it


      Author's profile photo AMIT AGRAWAL
      Blog Post Author

      Thanks Mohamed. If you have not, check out a feb 26 Wall Street Journal article that talks about this exact phenomenon and also how the likes of Kohl's and Nordstrom's are stationing executives in silicon valley and cozying up to technology startups and venture capitalists. Can't link to the article - but here is how it goes .. As you said successful retailers will be the ones that can transform themselves and the industry like never before.

      Targeting Tech-Savvy Startups


      Three months ago, Rodrigo Carvalho and Lukas Bouvrie were working 20-hour days to raise money and attract clients for Black Locus Inc., a 20-person Austin, Texas, startup that uses algorithms to help retailers sell their wares on the Web.

      Now, the recent graduates of Carnegie Mellon University’s business school work for the world’s largest home-improvement retailer, Home Depot Inc.


      Author's profile photo Paula Rosenblum
      Paula Rosenblum

      Hi Amit,

      As you observe, Marc Andressen is a bit off-base.  People are social and they will always want to shop together. The new imperative is creating a differentiated and interesting in-store experience.

      I'm not sure if retailers need to think like software engineers. I am sure they need to think about the unintended consequences of ignoring their customers.  There have been recent rumblings again to think like an airline.  I can think of no worse model. Instead, they should think like the staff of a well-run hotel.

      I am always happy to read thoughtful pieces on my industry.  Thanks for creating one...


      Author's profile photo AMIT AGRAWAL
      Blog Post Author

      Paula - Appreciate your comments. Totally agree that shopping is social and that people will always want to shop together. Over time more and more of that need will certainly be met online - but I don't think that time is anywhere near. And as you pointed out, I certainly hope retailers don't borrow too much from the airlines - I for one can't remember when was the last time I had a great experience in the air.

      Author's profile photo Former Member
      Former Member


      Very thought provoking blog!  I think we would all tend to agree that conventional retailing is being challenged by newer paradigm of technology (online portals, social media, mobile, better data analysis, etc…). Trick for retailers is to recognize the changing game and have a strategy depending on their customer needs. I think it’ s very interesting from consumer aspect as well, as they are going to be biggest beneficiary (wohoo). I actually see “evolution” in ‘demise of Retail’. What remains to be seen is whether traditional retailers can compete with Amazon(s) and beat it; or software companies like Amazon(s) and Google(s) of the world defines new retailing.


      Author's profile photo AMIT AGRAWAL
      Blog Post Author

      Hi Ravi - You are exactly right - "traditional" and "online" retailers are trying to reach the same end state starting at opposite ends of the spectrum. As you pointed out it remains to be seen who reaches there first and gets to define the new world of retailing. It's not unlike what is happening in many other industries - will Netflix catch up to Time Warner first (killing the cable business) or can the cable companies get their act together and deliver compelling streaming content killing Netflix. Exciting days indeed!