This past Christmas, online took nearly 15% of U.S. retail sales. Yet, back in 1998, only 20% of consumers had been online in the previous 12 months. Physical retail misunderstood the threat back then.
Today, a small number of technology companies are yet again experimenting with a new frontier: conversational commerce. Even though it is not yet even a decimal place in total sales, retailers risk once again losing a war that they don’t even realize that they are fighting.
What is conversational commerce?
Conversational commerce enables shoppers to make purchases by talking to Personal Digital Assistants (PDA’s), such as Apple’s Siri or Amazon’s Alexa. This can be from smartphones, but also through the growing segment of smart home technologies.
For it to cause a paradigm shift in purchasing, there needs widespread penetration, which has been achieved with smart phones. And, new research from Park Associates shows that 28% of U.S. broadband homes are already very familiar with Amazon Alexa, with 32% already having a smart device.
Second and more challenging: what will it take to change existing behaviors for consumers to try an alternative way of doing things? One truth will accelerate adoption: Voice is our most natural medium of communication. Early adoption is also occurring with children who can’t yet type, creating the wave of Generation Voice. Once the technology has matured sufficiently to understand personal nuances, it will be more intuitive for many situations.
Let’s use an example of a parent asking Alexa to purchase diapers. They won’t have a shelf to browse or a list of search results. Alexa will list a couple of options that can then be narrowed further along feature dimensions, such as pack-size.
The parent hasn’t mentioned a retail or product brand, so they’ve left that recommendation to Alexa. This will apply further pricing pressure to CPG and retailers that are already facing an unprecedented competitive market environment.
Which business design will win?
Each intermediary has its own game plan, not all of which are clearly aligned with a retailer’s long-term success. It will require careful consideration for where to prioritize scarce resources and the need to balance short-term profitability with long-term sustained growth.
Amazon has done more to disrupt retail than any other company. Around half of all U.S. product searches start from Amazon, enabling Amazon to dictate terms with those that participate in their ecosystem. Those that do, benefit from increased sales but surrender strategic control of their customers.
A potential weakness for Amazon is its lack of mobile hardware. Most conversations with Alexa will take place in the home, meaning it misses out on the opportunities found on-the-go.
Google (Google assistant)
While Google doesn’t yet have the in-home penetration that Amazon has achieved, it has sold 52m home devices. The assistant is also available on the majority of Android phones and tablets.
What is also attractive is that Google isn’t in the business of retailing. Not only does Google not want to be in the business of managing the selling relationship and back-end logistics, it is experimenting with retailers employing their own PDAs through Google technology. Instead of Google Assistant having to be an expert in everything you might need help with, it will have ‘friends’ that specialize in particular topics.
Apple has made two strategic decisions that materially differ from Amazon and Google. First, Siri is primarily a mobile-focused solution. Second, it concedes that privacy is paramount and that your data should be protected.
Both strategies hinder conversational commerce. Try asking for Siri while your phone is in your pocket. The protection of your data also means that Siri doesn’t have as much context about your likes and dislikes. This hinders her ability to be relevant in how she answers.
In regards to the intangible world of brands, this will be a substantial barrier. Apple is coming late to this game, but it’s helped by a passionate and more clearly defined premium customer base. Brands that have equity with this base may be actively sought by Apple for a more distinctive experience.
Samsung has Bixby, Microsoft has Cortana. As the category grows, no doubt more competitors will emerge. Both Samsung and Microsoft are capable, but may be hamstrung by the lack of an installed hardware ecosystem that will become harder to replicate, meaning people will be less likely to purchase a whole new house of smart devices once they’ve made the initial investment.
So, what’s to be done?
- Build expertise in conversational machine learning within your category and with your customers. Your data and insight will enable greater relevance for PDAs, thus making your brand more attractive.
- Strengthen contracts teams. They are going to need to be savvy in the use and ownership of data to ensure equal footing with the technology firms that you will partner with.
- Build relationships with those firms. Nobody can predict when the tipping point for conversational commerce will come. As with all AI-driven technologies, the pace of change will be exponential and the traditional fast follower strategies may not be sufficient.
Conversational commerce will be as dramatic a shift in retail as the launch of the internet. Both CPG and retailers need to prepare now for the opportunities and challenges that will come.
Lippincott is a global consulting firm serving brands.Favorite