Will Facebook Ever Be an E-Commerce Powerhouse?

A big part of what Facebook sees as its future — and a big justification for the $75-billion market value the company is theoretically being given — is the idea that the giant social network will become an e-commerce powerhouse, producing billions in revenue from retailers and major brands. But is that realistic? One analyst says no. In fact, Forrester Research’s Sucharita Mulpuru says in a report released Thursday that when it comes to e-commerce and driving substantial amounts of business-to-consumer revenue, Facebook may already be as big a player as it’s ever going to get.
According to Mulpuru, who surveyed dozens of retailers large and small about their use (and/or their lack of use) of Facebook as a retail sales channel, “while pockets of opportunity for Facebook do exist, the likelihood that Facebook will ever be ‘the next Google,’ (s goog) thereby becoming a key sales-driving tool for retailers and creating a reliable revenue stream for Facebook, is unfortunately far-fetched.” Why? The Forrester analyst says that Facebook-based stores are largely ineffective, especially for larger retailers, and that click-through rates are also anemic. In a nutshell, the analyst says:

In spite of the fact that hundreds of millions of people around the world have Facebook accounts, the ability of the social network to drive revenue for eCommerce businesses continues to remain elusive. eBusiness professionals in retail collectively report little direct or indirect benefit from Facebook, and social networks overall trail far behind other customer acquisition and retention tactics like paid search and email in generating a return on investment.

The report’s findings show most retailers are still just experimenting — in some cases because they feel that they should — and social networks still rank dead last in customer-acquisition tactics, with 7 percent of those surveyed saying they use them, compared with 90 percent for search-engine marketing. According to the retailers Forrester talked to, social networks are barely any more effective than run-of-the-mill banner advertising, in part because click-through rates are low (1 percent, compared with a click-through rate of about 11 percent for email marketing). Facebook stores also don’t perform well, and some retailers say the network tries to push retailers towards banner ads instead.
Taking advantage of Facebook’s open graph — through “like” buttons but also the sharing of shopping activity with one’s network, etc. — is useful, but is really only effective when there is a large enough network of users doing this, says Forrester. This fact “ultimately renders the Open Graph (and the specific value of Facebook) inadequate for all but the very large companies” such as Amazon (s amzn). And while companies can get a lot of data from Facebook about customer interaction, comments, behavior and so forth, Mulpuru says that “the unstructured nature of data from social networks… makes it difficult for even the most sophisticated natural language processing tools to shape meaningful conclusions.” In other words, there’s lots of data but it’s not very useful.
Forrester says there are many who benefit from Facebook — including “small, pure plays” for whom Facebook is like “the 2011 version of Yahoo Merchant Solutions (s yhoo) or eBay ProStores (s ebay),” in that it allows anyone selling something to set up shop and market themselves relatively quickly. These kinds of enterprises, as well as local and community-based companies, often benefit the most from the word-of-mouth advertising that social networks specialize in. Other things that work well are categories that have a tendency to “go viral,” such as movies or books and other forms of digital entertainment, anything that sells well in a peer-to-peer marketplace (in which Facebook effectively competes with Craigslist) and of course anything related to online gaming.

Mulpuru says that the challenges for Facebook include:

  • making Facebook stores more effective (Forrester says they currently generate less than 1 percent of e-commerce revenue for retailers with “robust web businesses”)
  • competing with Google in search: while Google matches shoppers’ needs with specific products and stores, Facebook is more of a directory or a communications tool, and therefore less successful
  • making payments work: Facebook Credits has potential, says Forrester, but payment systems are complex and many retailers have yet to even adopt PayPal, which is much more mature
  • showing that it cares about privacy: Forrester says that many retailers are concerned by what they see as a “reputation for apathy around privacy issues.”

It could be that Facebook as an e-commerce platform is such a new thing that the industry has yet to grasp how effective it can be. But if Mulpuru is right in her analysis, one of two things will have to happen: either advertisers and major corporations have to change the way they are using Facebook — and see some kind of return on the experiments they have so far been conducting — or the dreams that Facebook will become a major player in business-to-consumer retail will have to be revised. And if it’s the latter, then some of those $75-billion theoretical dollars the company is worth will have to go away.
Post and thumbnail photos courtesy of Flickr user Zach Supancic