Should I Sell on Facebook Shops? These are the Risks to Worry About
For businesses of all sizes there has never been so many avenues to reach consumers. Earlier this year in May Facebook launched Facebook Shops. Facebook Shops allows businesses to create a digital storefront on Facebook or Instagram. Businesses also have the option of importing an existing product catalogue directly from their Shopify or BigCommerce website to Shops. That is not all. By using this service brands are also given access to customer messaging via Messenger, Instagram Direct and WhatsApp which allows customers to contact businesses directly using one of those services.
Facebook is promoting Shops as an easy way for businesses to set up online storefronts. If a customer sees something they like on a brand’s Facebook page or in a Facebook ad they can buy the merchandise within Facebook’s app. That means that customers do not have to take the extra step of going to the brand’s website to complete the transaction. As the Nasdaq writes “as Facebook users start adopting the feature, storing their credit card information with Facebook, it could create a virtuous cycle -- a network effect -- increasing the ease of conversion within Facebook versus navigating away to the retailer's website. That will lead to more shopper data for Facebook to target ads and recommend products, just like Amazon does.”
It is free to set up a storefront within Facebook Shops but Facebook will charge a 5% fee per shipment or a flat fee of $0.40 if a purchase is $8.00 or less starting next year. While Facebook Shops makes it easy to get up and running with eCommerce and provides access to a vast user base the bigger question is whether or not you should step up shop on Facebook.
Is setting up a storefront on Facebook Shops really free?
Facebook says it’s “free” to set up a store on its app but is anything really free? One can only imagine how many engineers are working on this service from design to development to launch to adding new features to ongoing maintenance. That’s a cost Facebook has to recoup. Facebook CEO Mark Zuckerberg has even said that he is personally involved in this initiative.
If you look at history you will see a pattern of Facebook offering “free” services that end up becoming problematic for Facebook’s partners. One well known example is from the news industry. With the promise of reaching Facebook’s vast user base many news publications began publishing their content for free on Facebook.
As more and more people began consuming news on Facebook they stopped going to the websites of publishers causing publishers to lose ad revenues. This excerpt from a 2018 article by TechCrunch spells out the issue in detail: “big news outlets stupidly sold their soul to Facebook. Desperate for the referral traffic Facebook dangled, they spent the past few years jumping through its hoops only to be cut out of the equation. Instead of developing an owned audience of homepage visitors and newsletter subscribers, they let Facebook brainwash readers into thinking it was their source of information.”
“Emphasizing the ‘news’ in News Feed retrained users to wait for the big world-changing headlines to come to them rather than crisscrossing the home pages of various publishers. Many don’t even click-through, getting the gist of the news just from the headline and preview blurb. Advertisers followed the eyeballs, moving their spend from the publisher sites to Facebook.”
This shift in consumption of news from publisher websites to Facebook has caused financial ruin in the news industry. But can you really blame Facebook for this? Some will say yes but Facebook created a platform where people want to spend their time. The lesson to be learned is clear, don’t let history repeat itself. Be warry of “free” services and recognize that while you may not pay to set up your storefront you are paying Facebook in other ways.
You are paying by giving Facebook traffic, customer shopping data, a potentially more engaged user base, a part of your customer experience and the means to create an online marketplace. What you are offering is more valuable than you think, and it is certainly not “free.”
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What’s “free” today you may have to pay for with your dollars tomorrow
eCommerce is a big business with estimated sales of $794.5 billion in 2020 in the United States. It is also a sector of the economy that is growing at a healthy rate. In 2020 eCommerce sales grew at a rate of 32.4% and sales are projected to grow at a rate of 6.1% and 13% in 2021 and 2022 respectively.
What brands have to think about is what happens if Facebook decides to increase its transaction fee? Earlier this year sellers on Etsy were outraged when fees charged to sellers on the platform increased. Some of Etsy’s sellers are now subjected to a 12% fee for a new advertising program. “Unforeseen costs are exactly what you try to plan for,” says Jen Wofford, who has a jewelry store called minusOne on Etsy. “12% is a pretty high unforeseen cost for a small business.”
Cost increases are one of the potential risks of partnering with Facebook. Facebook says its business is ads but with a segment of the retail sector, eCommerce, moving towards becoming a trillion dollar economy it is realistic to think that Facebook wants a larger piece of that pie. Having low fees is an easy way for Facebook to gain scale only to shift the balance of power once Facebook Shops has reached a critical mass.
Another way to see the risk that comes along with partnering with digital platforms is to look at the restaurant industry. With the COVID-19 pandemic forcing consumers to eat at home delivery platforms have taken off. DoorDash’s IPO last week valued the company at $60 billion. Millions of restaurants are struggling but the power lies in the hands of companies that aggregate retailers onto a single platform.
Commissions on food delivery platforms can be as much as 30% and now many businesses are dependent on these platforms. As soon a planform whether it’s DoorDash, or Amazon or Facebook has a critical mass of retailers the power of individual brands diminish and the risk of conducting business with them increases.
Should you build your brand or someone else’s?
The decision of whether or not to sell through your own channels or someone else’s is not easy. For a brand starting out it may not have another option if it wants to sell its products online. It may elect to use Facebook Shops since the transaction fee is low or it may choose to sell on Amazon or both.
But every business should have an eye on owning critical parts of the customer experience. That could be a customer facing website or customer service. When you think about the most successful retailers whether its Apple or Walmart or Amazon one thing is certain they own their most important assets. “There will be obvious downsides for brands should this [Facebook Shops] prove successful. It will mean more and more data is held within the walled gardens, further reducing first-party data, so this trade-off, along with many others, will have to be evaluated,” says Stuart McLennan, senior VP APAC, Rakuten Advertising.
If you spend all of your time building someone else’s brand over time you may realize you don’t have a lot to show for it. It may be fine to dabble on some of these platforms so that you have a presence in a place where your customers are spending their time. But make sure there is a reason for customers to go to your own website where you have better data on the people visiting as well as more control over the customer experience. Power lies in ownership. Facebook knows this and so should you.