In today's newsletter we answer why Facebook's foray into e-commerce right now makes a lot of sense.


The Story

Facebook has been seeing its ad revenues flatline. In fact, the company even confessed recently that they saw a significant reduction in advertising during the last three weeks of March. By April however, things were stabilizing, but advertising revenue has been approximately flat compared to the same period a year ago.

Meaning ads are no longer bringing in the big money.

I mean its not rocket science. Businesses are running out of cash and they are having to prioritize. So they are switching from growth to survival mode. Pruning ad spends is simply a natural consequence of this transition. After all, what’s the point of advertising if you can’t make it through the pandemic.

But then the pandemic is also affecting businesses in more sinister ways. It’s weeding out entities that have had no recourse to make money during the lockdown. Think about it — The only way to make money right now is by selling online and if you aren’t selling online, you’re making no money.

On the flip side, if you’re a business that was already doing business on something like an Amazon, you have a veritable advantage now. If you’re a restaurant partner with Zomato, you can still do business. Even if you’re just a regular shop owner with an e-commerce website, your chances of survival have improved drastically.

It’s almost like Darwinian Natural Selection is at work here. Those who adopted e-commerce early are more likely to make it through the lockdown. And as a consequence, those entities will likely become a substantial majority within the business community once the pandemic subsides.

So it makes perfect sense for someone like Facebook to try and leverage this opportunity and that’s precisely why they are launching “Facebook Shops” now.

Think of “Shops” as a virtual storefront — only the real estate here is Facebook and Instagram. As a seller, you can list your products on the app and interested folks can browse through your catalogue and purchase what they need without leaving the app.

But then as Recode pointed out

Facebook is not charging a fee or taking a cut of sales from companies that set up storefronts in the new Shops feature unless they use Facebook’s “Checkout” feature. If they use “Checkout” to accept payments rather than using another e-commerce software firm, they pay 5 percent, which is higher than typical payment processing fees but lower than what Amazon or eBay charges.

However,  I don’t think this is Facebook being magnanimous here. Because even if they don’t get a cut from every sale that’s generated on their platform, they will probably make money elsewhere. For instance, if you take a liking to Facebook and set up your storefront here, then you’ll have to have signboards asking people to shop. Meaning, you will now have to spend on ads trying to target unsuspecting customers into buying something off of you. Ergo, Facebook’s ad revenues will likely get a decent boost.

Also, many people have been contesting that Facebook is probably taking a leaf out of Amazon’s playbook here. After all, they are getting small businesses to list their products onboard the platform. What’s the difference anyway?

Well, because there’s no indication that Facebook is trying to take care of end to end logistics as Amazon does. I don’t think Facebook wants to set up warehouses, do inventory management, ship orders and offer discounts. Facebook is trying to become a discovery platform. You can list your products online and use Facebook to gather more eyeballs. Beyond that, there isn’t much happening right now.

Also, people go to Amazon with very specific objects in mind — buy a trimmer, buy a bag, buy a purse, that kind of stuff. I don’t think people will go to Facebook actively looking to buy “something”. Instead, it’s more likely to resemble a trip to the mall. You are mindlessly strolling. Or in this case, browsing through your Facebook feed and you suddenly see a pack of UNO Cards listed from a seller in Chandigarh.

Well, you have been meaning to play UNO for a while now. So why not add the product to the basket, make the payment and hope the seller delivers on time.

Well, why not?

Until then….

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