This is the second in a three-part series on the “Democratization of Local Commerce.”
For much of the last century, brand dominated the way we shopped. A traveler stayed at a Hilton over a small, but exceptional, boutique hotel because they knew what to expect with the chain. Or, we drove 30 minutes to a Home Depot to find a particular tool instead of shopping at an independent hardware store because they knew it would be in stock.
But the “ brand era” that gave rise to some of the tentpoles of the American economy may soon come to an end. The web, now reachable wherever and whenever through smartphones, can help consumers answer many of the questions that brand once answered. What’s left is a more level playing field in which a small provider with a superior product can compete like never before.
Brands: The Gatekeepers of Trust on Main Street
Despite the talk of entrepreneurship, it’s still good to be big. The portion of employees working for retail businesses with under 500 employees has dropped 10% in the past eight years, declining from a little over 40% in 2006 to 36% in 2011. In an interview last spring, Brian Headd, an economist at the SBA Office of Advocacy, attributed the decline to a wider shift in the retail trade, which has developed over the past few decades.
“One of the critical trends over the past twenty years has been the decreasing shares of small businesses,” Headd told me in May. “It’s been slowly going on for a while. I would say that in looking at [the data] over the years, the businesses that start out bigger tend to last longer — whether that means they fared better is an open question.”
The success of large local sellers stems in part from a unique challenge in the physical marketplace that emerged in the mid-20th century. In the post-war period, the U.S. invested in a vast transportation infrastructure that connected regions in unprecedented ways. We worked and relaxed in new a previously foreign parts of the country, shopping in a new markets more frequently than ever before. Consequently, Americans started to shop in places they did not know well. We became regional and even national consumers.
But our transience created an information problem: the more we spent in new places the less we knew about the businesses where we shopped. The national marketplace, so to speak, lacked the basic tenets of any marketplace — trust and discovery. That’s where brand came in. A strong brand helped consumers discover (we know the products McDonald’s sells) and trust (we know what to expect since every product is made the same) products in a foreign marketplace. We could enter a McDonald’s in Toledo or in Tampa and could expect the exact same experience.
The declining value of brand
If we agree that brand played an important role in helping us to discover and trust products and services sold in unfamiliar marketplaces, we can start to look at brand as a “search and discovery” product in direct competition with Yelp, Google and other providers of local search. Therefore, the growth of one comes at the expense of the other.
With mobile adoption nearing ubiquity, consumers in the U.S. now have access to a wealth of information at nearly every point in the local shopping experience. For smartphone owners, local search is available everywhere. In a recent Google survey of smartphone owners, which in the U.S. represents roughly 65% of the population, four out of five respondents above the age of 18 said they used their devices to search for local information on the web.
Research already suggest that access to product information impacts the way consumers make purchase decisions. A few years ago McKinsey and Company released research looking at the new purchase funnel, and found that in many, ways it wasn’t a funnel at all. The very premise of the funnel — that consumers make decisions deductively from an initial considerations set — was no longer applicable.
The study found that we are far more active in the consideration phase, actually expanding, not reducing, the number of brands they consider as the moved to the moment of purchase. For instance, by the time consumers began the process of actively shopping for a car, and visiting lots, they have added on average, 2.2 more brands than the initial considerations set — the brands, which they said they were interested in when they first started shopping. Moreover, nearly a third of all sales came from brands that they did not initially consider, but found in the research process, likely through tools like Autotrader and the like.
Last year, Itamar Simonson, the Stanford professor who is considered one of the top experts on the consumer decision making process, published a new book, which takes a look at the impact that access to perfect information has on the way consumers make purchase decisions. The big finding is that more and more, the value of brand, and the type of awareness marketing aimed at keeping the brand top of mind, is quickly eroding.
With brand playing less of a role in the way consumers make decisions, the marketplace opens up to newer, and often smaller, competitors. As consumers increasingly feel comfortable using software to determine trust, new companies with a superior product can build an audience much faster than ever before. Quickly, the standardization implicit in the brand era becomes a liability and the diversity of a fragmented marketplace becomes an asset.
Economies of “unscale” across the business stack
Last year, Hemant Taneja, managing partner at General Catalyst, wrote an essay in Harvard Business Review detailing the emergence of new business platforms that democratize the economies of scale that once dominated the economy. The decline in the value of brand may lead the way but widespread democratization relies on advances in two other key industries: marketing and manufacturing.
But that’s starting to change. Consider the marketing industry, which for years was dominated by large centralized media networks such as television, newspaper and radio. Advertising on these networks required business to buy the entire network, which often cut across not only geographic but demographic and psychographic groups. That meant that these products were naturally tailored for mass market brands. A more niche brand would have to pay for a large percentage of people outside its target audience, making the return on investment far less attractive.
Even more importantly, we’re starting to see changes in the rules of manufacturing. For years, the production process was dominated by scale: It was exponentially cheaper to produce 100,00 of one item than 1 of 100,000 items. That’s still true, but McKinsey believes that customized product is within reach.
“We believe the time for widespread, profitable mass customization may finally have come the result of emerging or improved technologies that can help address economic barriers to responding to consumers’ exact needs in a more precise way,” analysts argued in an article published in February. The market for customized products has expanded as the cost of custom manufacturing has declined rapidly, the consulting firm argued.
Together, these changes reduce the competitive value of scale in selling locally. A smaller company with a superior product can compete with a multi-national brand, using a bevy of new platforms to access the benefits of scale without assuming the costs.
What’s important to realize is that scale isn’t disappearing from the physical marketplace. It’s simply relocating to a different part of the business stack that is less visible to the consumers. As we’ve seen in media, the centers of value creation are shifting from the brands who package and sell the products to the platforms that provide the tools necessary to do so.
Steven Jacobs is Street Fight’s deputy editor.