11/14/2017 Online2Offline Commerce Andreessen Horowitz

Software Is Eating the World

ECOMMERCE

Online2Of ine Commerce

by Alex Rampell

Editors note: This article popularizing (and coining, for better or worse) the concept of online-to-
of ine (O2O)commerce by now-a16z general partner Alex Rampell was originally published
exactly 7 years ago inTechCrunch. Today, its a huge market especially in China.

What do Groupon, Restaurant.com, OpenTable, and SpaFinder all have in common?They

are all enablers of online to of ine commerce.Groupons growth has been nothing short of
extraordinary, but its merely a small subset of a growing category which Id like to call
Online to Of ine (O2O) Commerce, in the vein of other commerce terms like B2C, B2B,
C2C, etc.

O2O is more of an adverb that modi es those business classi cations: its a combination of
payment model and traf c generator for merchants (and a discoverymechanism for
consumers) that changes and creates of ine purchases and is inherently measurable, since
every transaction (or reservation, for things like OpenTable) happens online. This is
distinctively different from the directory model (think: Yelp, CitySearch, etc) in that the
addition of payment helps quantify performance and close the loop more on that later.

In retrospect, the fact that this is big, or that Groupon has been able to grow high-margin
revenues faster than almost any other company in the history of the internet, seems pretty
obvious. Your average ecommerce shopper spends about $1000 per year. Lets say your
average American earns ~$40,000 per year. What happens to the other $39,000? (The delta
is higher when you consider that ecommerce shoppers are higher-income Americans than
most, but the point is the same).

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11/14/2017 Online2Offline Commerce Andreessen Horowitz

Answer: most of it (disposable income after taxes) is spent locally. You spend money at
coffee shops, bars, gyms, restaurants, gas stations, plumbers, dry-cleaners, hair salons, etc.
Excluding travel, online B2C commerce is largely stuff that you order online and gets
shipped to you in a box. Its boring, although the ecommerce industry has gured out an
increasing number of items to sell online (witness Zapposs success with shoes: $0->$1B in
10 years, or BlueNiles with jewelry). FedEx cant deliver social experiences like restaurants,
bars, Yoga, sailing, tennis lessons, or pole dancing, but Groupon does. Moreover, your locally
owned and operated Yoga studio has little marginal cost to add customers to a partially lled
class, meaning that the business model of reselling local (especially local services) is often
more lucrative than the traditional ecommerce model of buying commodity inventory low,
selling it higher, and keeping the difference while managing perishable or depreciating
inventory.

The important thing about companies like Restaurant.com or Groupon is that performance
is readily quanti able, which is one of the tenets of O2O Commerce. Traditional ecommerce
tracks conversion using things like cookies and pixels. Zappos can determine their ROI for
online spend because every completed order has tracking code on the con rmation page.
Of ine commerce doesnt have this luxury; the bouncer at the bar isnt examining your
iPhones browsing history. But O2O makes this easy;because the transaction happens online,
the same tools are now available to the of ine world, and the whole thing is brokered via
intermediaries like Restaurant.com. This has proven to be a far more pro table and scalable
model than selling advertising to local establishments; its entirely due to the collection of
payment by the online intermediary.

Does Groupon deserve a 10 gure valuation? Its easy to see a world where O2O commerce
dwarfs traditional (stuff in a box) e-commerce simply because of ine commerce itself
dwarfs online commerce, and O2O is simply shifting the discovery and paymentonline. If
Groupon can grow its leadership position, I predict an 11 gure valuation based on
discounted cash ow alone. Groupon is not a gimmick or a game, but a successful example of
of ine commerce being driven by an online storefront and transaction engine.

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11/14/2017 Online2Offline Commerce Andreessen Horowitz

Venture capitalists and entrepreneurs would be wise to think beyond cloning the deal of
the day concept and instead think about how the discovery, payment, and performance
measurement of of ine commerce can move online. This will have ripple effects across the
whole internet industry advertising, payments, and commerce as trillions of dollars in
local consumer spending have an increasingly online genesis.

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August 7, 2017

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