Mobile Cannibalism: Get Used To It

With several major retail mobile sites starting to yield significant traffic and/or sales--Pizza Hut's iPhone app, for example, is about to pass the 2 million download mark--senior execs at various chains are grappling with what should be expected of the telephone terminals, what Lily Tomlin's Ernestine the switchboard operator might have called Ringy Dingy Revenue.

What is a realistic near-term goal? Is it to generate true additional revenue or is it acceptable--initially, at least--to simply shift purchases from Web to mobile? Moving from revenue to the much-beloved profit margin, is it possible to say whether mobile or Web has lower operational costs?

That last point--determining whether an $80 sale in mobile is more profitable than an identical sale on the Web site--gets almost impossible to answer. That's especially true when the technology architecture for mobile is partly, but not completely, shared with its Web site sister.

For example, some sites, such as American Eagle Outfitters, Walgreens and Chico's, have mobile sites that rely almost 100 percent on their Web counterparts to function, while others, such as ToysRUs, Ghiradelli and 1-800-Flowers, have more expensive sites that function completely independently. That has two advantages. First, it allows the site to be much more aggressive--and creative--in being designed precisely for the mobile environment and to take advantage of pure-mobile features.

Second, it allows the mobile site to act as an emergency backup for the Web site, when the site is down for a prolonged period, such as what happened to American Eagle Outfitters last month when its Web site was either down or sharply limited for eight days. How do you allocate costs between mobile and Web when one is a backup for the other?

It doesn't end there. An IT executive at one of the nation's largest chains added that the cost differences are also dictated by lots of programming decisions after the general platform is chosen. "From an technical perspective, it depends on how much legacy architecture requires enhancement to support mobile," she said. Moving to a service-oriented architecture brings efficiencies for cross-channel development. Using HTML5 simplifies developing mobile apps for multiple platforms, such as Apple iOS, Palm WebOS, Windows Mobile and Blackberry. But that loses access to some native capabilities. And using some mobile technologies, such as SMS, means a per-use cost is built in.

Then there's the problem of what we mean by mobile commerce. Is it a mobile site that allows for purchases, which will be funded by a credit card, such as the Pizza Hut app? Or is it an in-store application where the phone acts as a card-swipe, such as what Apple Stores use? If the phone is being used in-store--or even remotely--to swipe a mag-stripe, then it has a clear financial margin advantage in the form of turning a Web site's card-not-present interchange rate into the much lower mobile-swipe card-present fee. (If the card is a contactless card, the equation can get more complicated.)To make comparisons easier, let's assume the mobile app we're discussing is to remotely allow for a purchase--such as Amazon's app--that will likely be funded by a traditional payment card. As mobile purchases expand more, should it be held to the same Web E-Commerce standards?

Making this debate even more complicated is the unanswerable question: "Even if revenue across all channels is flat, how do we know that sales would not have plummeted had we not deployed mobile?" When arguing with a CFO, it's always fun to point to the millions in revenue that otherwise had been lost had they not approved your initiative. Proving a negative is easy, as long as no one is paying too much attention.

That said, if the target demographic is one that is in love with all things mobile (hello, Gen Y), taking yourself out of any conversation is quite dangerous.

Said one major retail chain CIO who is in the midst of such a transition: "I don't see any risk and I wouldn't want to avoid those channel shifts. It's still coming through digital channels, which is what customers want and at a much lower cost than phone or traditional storefront. Let's look at the bigger picture. Smartphone sales are going through the roof and customers want to use those devices for apps and other data needs. Having a mobile presence is about meeting those customer's changing expectations."

Added that CIO: "Using a mobile app is easier than a Web site because mobile devices are always connected and they are always on. That is much easier for a customer than waiting for their laptop to boot up, connect to the network, launch a browser and type in the URL. So, as a company, you have to ask yourself: 'Do you want to respond to your customers' needs? And what is the cost of not doing this?'"

A reality check is that, from a broader perspective, these are very old arguments, going back to the pre-E-Commerce days when chains had nothing but in-store. "When you decided to open up another store 10 miles from a very successful store, the manager of that first store thought 'All you're going to do is steal my customers,'" said Richard Mader, executive director of the National Retail Federation's Association For Retail Technology Standards (ARTS). "The counter was to say 'I can attract additional people from this outreach area.' You've got to look at mobile as a way to establish and improve relationships with a customer on a long-term basis. I may get a customer who really loves to deal with their mobile device."

One of the retail IT execs said senior management needs to understand that sales shifting from one channel to another is a fact of retail life, and mobile is no exception. "When a retailer has a complex multi-channel strategy to sell basically the same product, cannibalization will occur and, in many cases, it will be significant," the IT exec said. "However, with the engagement of new channels, it should be expected that there will be opportunities for new customers, cost efficiencies and a larger piece of market pie."

Another factor is that, compared with E-Commerce, there are far more platforms that mobile needs to consider supporting. Granted, an E-Commerce site needs to deal with programming differences between Internet Explorer, Firefox, Opera, Chrome and Safari browsers. But that's trivial compared with the mobile differences between the iPhone, Blackberry, Android, Palm, Windows Mobile and Symbian platforms. The lack of standardization in mobile today makes Web standards look positively strict and orderly.

"Managing a single Web store versus [an unlimited] number of mobile devices" is huge, said Paul Rasori, Verifone's senior VP of global marketing. When dealing with in-store product purchases, he compared managing a Web site with "more than a thousand mobile devices that you have to purchase and manage."

What's old is new again? As the board of directors starts getting comfortable with soaring mobile sales, they'll default to what they know and try and apply Web and brick-and-mortar standards to mobile. The trick will be convincing them to simultaneously accept that cannibalization is nothing new and should be dealt with as it has been dealt with for decades while also embracing mobile's unique attributes. "It's the same despite huge differences." Yeah, that's the slide I want to show to the board.

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