The Sharing Economy Goes Behind the Counter

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sharedFor small brick-and-mortar businesses, the cloud computing revolution has largely come in the shape of a smaller price tag. Forget paying six thousand dollars for a point-of-sale system — an upstart coffee shop can buy a tablet, and pay a few hundred bucks a year for software that offers comparable functionality to a legacy system.

That’s big news for small business, and it’s a shift that will help lower the economies of scale that have kept the efficiencies and capabilities of back-office computing only in the hands of those that had the capital to invest. But price is only the beginning in what will be a much more important shift in the way small businesses share data and leverage one another to create a distributed network that more effectively competes with more traditional corporate structures.

“Competing against big-box retailers and chains, who dominate not because they’re better or faster, but just because they’re bigger, is difficult, but now it’s possible because of the cloud,” Norm Merritt, president and co-CEO at Shopkeep, a point-of-sale startup that has raised nearly $40 million, told me over email. “These tools give small merchants the advantages of scale without needing to give away all their profit to a franchise or lose their soul to a corporate model.”

To understand the potential impact of cloud-based software on small business, we need to grasp a broader shift within economics away from centralization and vertical integration. What’s left is a more horizontal economic structure, in which a stack of platform technologies operate in conjunction with one another, and the end providers — the retailer, or coffee shop, or mechanic — sits on top of this “stack” and aggregates these technologies.

As economist Jeremy Rifkin laid out the argument in a recent interview with Street Fight, it’s more efficient for a single company to handle logistics on its own, but its less efficient in the long run for the retailer because it means that a core part of its business sits outside of its corporate control.

We’ve seen similar platform-driven economies emerge on the web and in mobile. That’s because the marginal cost of integrating two businesses systems, already built online, is near zero. Think of the way social, commerce, and publishing technologies have blossomed on the web, allowing for much smaller, more nimble businesses to emerge and compete with larger providers. As retail and other “offline” industries adopt cloud-based operations software, and their core operations run on the network, we’re likely to see a similar dynamic develop.

A cloud built for sharing
The shift has already started in the retail industry. The number of companies selling cloud-based point of sale software to small and medium-sized retailers has exploded in the past two years, and adoption is starting to ramp up as well. Pair that growth with a host of other customer relationship management, loyalty, and commerce software and the market is already reaching a meaningful size.

The low capital costs of the software-as-a-service model has driven most of the growth among the cloud-based point-of-sale sector so far. By storing data remotely in server farms rather than onsite, these new POS companies can improve scalability and reduce the waste implicit in each company owning its server. Companies can rent space rather than buying hardware. That’s a lot cheaper, and more efficient, in the long run.

Sharing is implicit in the cloud — and, the pooling of servers is only a first step. There’s an opportunity for technology companies to use their install bases to help small businesses to share a range of resources more efficiently, replicating the economies of efficiencies of a larger organization without sacrificing the creativity, responsiveness, and flexibility of a network. It’s the a sharing economy behind the counter.

The bigger the business, the more data it has on a market for a given product. A large retailer, for instance, will be able to more intelligently understand the ebbs and flows of the apparel market, and set prices accordingly. Think of each sale as a bit of free market intelligence, to which most small merchants naturally do not have access.

Shopkeep, the maker of tablet point-of-sale systems, has over 10,000 retailers on its network. The company wants to take advantage of its network to aggregate the collective sales data across its merchants to help small businesses better understand their performance compared to similar merchants. Jason Richelson, the company’s founder and co-CEO, says the product is still in the works but will “help with pricing and impacts profitability.”

Customer profiles
Today, nearly every big retailer offers some sort of loyalty program. In fact, the number of loyalty memberships in the U.S. doubled in the 2000’s, increasing from 900,000 million in 2000 to over 2 billion in 2010.

“What big companies discovered in the 2000s was that there was this whole right-hand side to consumer value equation, and that customer engagement was far more leveraged than acquisitions,” said Victor Ho, a veteran of consulting firm McKinsey and company’s loyalty practice who now runs Fivestars, a loyalty startup. Ho says the company, a competitor in a busy loyalty sector which includes companies like Belly, Mogl and Perka, wants to build a system that will allow smaller businesses to share this information across its network.

“If we have this rich repository of information about what you like, that you have a peanut allergy, that you’re a size seven — we can personalize your experience across all of these merchants,” Ho told me. “One small business cannot build that in a silo — it needs to be a platform.”

Bulk ordering
Maybe the most elemental advantage of being big is buying big. The largest companies can buy in bulk, netting big discounts from manufacturers. It’s why Wal-Mart can sell a television far below market value and still make a profit.

Co-ops have been around for a while, but today, startups want to bring them back. Gilad Rotem, the co-founder of Cups, a service that lets customers pay a monthly rate for unlimited coffee at a number of New York city cafes, says the company plans to eventually help businesses on its network to buy commodities — goods like milk and sugar — collectively.

We tend to think of the sharing economy as a consumer movement that helps us hail a ride or find a place to stay. But the basic logic driving the shift — the concept that cloud-based software can help improve coordination and allow us to pool resources more effectively — will start to impact the more mundane aspects of small business, allowing merchants to enjoy some of the advantages of scale that their larger competitors do.

Steven Jacobs is Street Fight’s deputy editor.