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.
- 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 ?
- 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.
- 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.
