July 23, 2012
I predict the next big buzzword will be pre-commerce.
In simple terms, pre-commerce is "buying stuff that doesn't exist yet".
In more grown-up words, it's a framework for companies to cheaply establish market demand for a new product idea and acquire the cash flow to produce it.
Pre-commerce is the retail industry answer to the startup industry "MVP" methodology. In Silicon Valley and its extended kingdom, the MVP or Minimum Viable Product is a method used by budding entrepreneurs to evaluate their ideas in a cheap and risk-free manner.
One example of how an MVP can manifest is dummy landing pages. An entrepreneur with an idea puts up a single-page website describing a problem and a solution with a "Buy Now!" button that does nothing when you click on it. If it gets a high number of clicks then the hypothesis is validated (people want to buy this thing!) and the entrepreneur is in a much safer position to invest in actually building the solution for real. It's an effective antidote to the nightmare scenario of spending months building something that it turns out nobody damn wants.
If an MVP is for software, pre-commerce is for physical goods. I believe pre-commerce has direct and immediately beneficial applications to the FMCG, electronics, fashion and entertainment industries but is yet to be adopted outside of the indie development world.
A pre-commerce campaign can simply take this format:
1) Establish the idea to the consumer
This can take the form of a website or a video. No physical product has been created at this point or at the most, a one-off physical prototype has been created to demonstrate the idea better. For pre-commerce to make sense, this stage needs to be performed cheaply.
2) Make an offer to the consumer
A common offer is buy this now at a discount and get it shipped to you first when we make the first batch.
3) Evaluate market viability
If enough sales are made, shift the idea into manufacturing phase with your new funds. If there are not enough sales, your proposal is not in demand so kill the idea and refund everyone's money.
By adopting pre-commerce a company can trade risk and cost for liquidity - all the while being more socially engaging. A pre-commerce campaign will help validate your product idea: not enough people transacting? That probably means your product idea is crappy and you shouldn't move to the manufacturing phase anyway. Hooray, you've saved millions of dollars. Pre-commerce makes product development decidedly more science than art.
With new platforms for commerce, one player always establishes itself as the incumbent. The competitive advantage at the platform level is scale, for example with auctions it is eBay, with online classifieds it is Craigslist and with group buying it is Groupon. With pre-commerce it is Kickstarter, where projects that are little more than an idea or a prototype with a good team can now raise millions of dollars in pre-commerce sales. That said there is absolutely still scope for pre-commerce to run successfully on more specialized verticals or on brand-owned channels - after all, pre-commerce works best when it reaches a highly targeted audience.
Lets explore what pre-commerce is and isn't.
Pre-commerce is not Crowd-sourcing an Idea
By running a pre-commerce campaign you are not obligating yourself to ongoing customer development regarding what the product should be. Some campaigns are run like this and it can be an incentive for consumer buy-in if they feel they will be part of the product development process. However, some of the most successful pre-commerce campaigns have been when a team puts forward a well-formed idea, demonstrates the ability to execute and simply says: let us know if this is something you want.
Pre-commerce is not Crowd-funding
Pre-commerce should have a deliverable associated with it. The consumer should receive a tangible benefit should the campaign be successful. This is different to raising funds for a cause - Pre-commerce campaigns should be a success or a failure based simply on market demand.
Pre-commerce is not Pre-ordering
In video game development pre-ordering is a common sales strategy at the retail level. However pre-ordering in this context is never a lever for evaluating product viability and it is certainly not used as a method for funding manufacturing. Pre-orders are simply used by retailers to establish consumer lock-in and loyalty. By the time a game is ready for pre-order it is well into development and the video game developer has already gone through a costly research phase behind closed doors to establish market demand.
Pre-commerce is not Focus Groups
One can argue that if pre-commerce is about establishing demand then focus groups already serve that purpose. The point of pre-commerce is to leverage the digital landscape (social, e-commerce) to conduct an open, massively scalable focus group who can purchase immediately. It's an open conversation not something that happens internally at R&D meetings with two-way mirrors.
Pre-commerce is a Transaction
Unlike an MVP, pre-commerce works best when there is an actual transaction. Pre-commerce is not voting, it's not clicking a Like button. It's a consumer saying "I will buy this now" even though the consumer knows that there is a risk it won't be produced at all (in which case they get their money back) and that the timeline to produce it is uncertain.
Pre-commerce is Social
Pre-commerce is about openly getting out there in front of real customers in existing social channels. It's about listening to customers on a massive scale, learning what they want and acting on their feedback. It's about creating groups of consumers who love your idea who can evangelize it to their friends who also might like the idea, further increasing the viability of your idea.
Pre-commerce is Testing
Businesses need to be aware that pre-commerce is a test. Sometimes you're going to get your hypothesis wrong and that's ok, especially if real consumers are part of the equation. If your pre-commerce campaign fails, you will have saved considerable costs and learned more about your customers - all the while having a conversation with them. For any business, this is a net win.
I believe that e-commerce has reached a tipping point. In the last 10 years we have slowly been creating or improving various consumer behaviors:
- More people are buying things online
- The social landscape means there is increased accountability and therefore consumer safety
- Internet scale means it is cheaper than ever for niche ideas to find their target audience
These three factors have given rise to pre-commerce. I believe that not only will pre-commerce diversify beyond Kickstarter into specialized verticals, but also that it will become an entirely normal consumer behavior and will be accepted as a form of commerce for a business' smaller projects or passion projects. I think we are about 18 months away from seeing a major brand adopting pre-commerce as a means for selling a new line of footwear, diversifying into a new category of electronic product or selling subscriptions to a yet-to-be-created TV series.