E-Commerce Lessons From The Early Days Of "Virtual Shopping Malls"

In the late 90s, e-commerce was like the Wild West: no rules, dozens of (weird) players. A decade later only a few have survived. Hiroshi Mikitani, CEO Rakuten's, Japan's largest e-commerce company, explains how they came out on top.

While it may seem surprising now, the e-commerce industry did not embrace customer empowerment in the early days.

Certainly the growth of the Internet and the advent of the World Wide Web made it possible for individuals to set up shop online. There were many early pioneers who did just that. But the difficulty of being a sole proprietor in the virtual world quickly became clear: you may have the best product in the world, but if customers don’t know you exist, you make no sales. This concern led quickly to online shopping malls.

Many of the biggest names in technology and media added online shopping mall developer to their list of activities. They created malls on the web and signed up merchants to fill their virtual storefronts. And one by one, they failed.

Let’s look at one example. In 1996, IBM announced it would open World Avenue--a virtual shopping mall designed to give the sixteen initial retail clients access to the global marketplace via the World Wide Web. Some big names in retail signed up: L.L. Bean, Hudson’s Bay, Gottschalks. It looked like the start of something big.

But less than a year after the debut, the project was discontinued. Why? The official reason was not enough customer traffic. But below the surface was a current of retailer dissatisfaction. The retail clients had been unhappy with IBM as a mall landlord. They did not appreciate the overlay of the IBM brand on their virtual stores. They chafed at IBM’s presence as an intermediary in their sacrosanct relationship with customers. In short, they believed IBM was hurting more than it was helping. Why should they pay for some outside company to create a barrier between them and their customers? The retail tenants quickly abandoned World Avenue.

What had IBM done wrong? Frankly, the same thing many other technology and media companies did wrong when they first dabbled in e-commerce: they insisted on ruling with a heavy hand. They came into the project determined to demonstrate their dominance, and they exerted control every step of the way. The purpose of this, IBM and others insisted, was to maintain efficiency and cohesion. But merchants rebelled.

We got into e-commerce in 1997. (And when I say “we,” I mean myself and my partner at the time.) We were no IBM or Microsoft, which had also tried and failed to launch an Internet mall. So I felt we needed a different strategy. I decided Rakuten’s mall would offer the opposite of the big companies’ malls. It would offer not a controlled storefront, but rather virtual empowerment.

From the start, Rakuten’s mall was different. We offered our services for a monthly price of fifty thousand yen ($650) payable in two installments based on an annual subscription. This was a fraction of what the big Internet malls charged. We offered merchants the opportunity to customize their web presence, rather than to fit into one designed by us. In fact, we were so committed to this process of customization that we developed special tools to give these merchants (many of whom had limited computer skills) the chance to make their virtual storefronts look just as they wanted.

This was not easy. My other employee was better at programming than I was, so I presented him with a copy of SQL for Dummies to inspire him. But in the end, we had to go out and hire a tutor to teach us how to create the tools. This seemed like a lot of work at the time, but I knew it was critical. Empowerment starts with a mind-set of enabling the client. We didn’t want just to collect the money to do this work for our merchants--we wanted them to be able to do it on their own.

We took the concept a step further with the communication between the merchant and the retail customer. In the original Internet mall construct--and indeed, still today in some of the other major e-commerce players--communication is controlled by the mall owner. The merchant does not have the ability to interact directly with the customer. Instead, all communication--orders, complaints, requests for information, etc.--is funneled through the mall operator.

This seemed to me like a tremendous waste of time and resources. Why should I be answering the merchant’s email? If a customer wants to know something specific about a product, he does not want to ask me. What do I know, sitting in my offices in Tokyo, about how the rice merchant in northern Japan ships his product? Or which among his products might be best for a particular customer? Or what makes his rice special? These are questions for the merchant, and the most efficient communication process possible is between the two parties themselves--without intermediaries.

We empower the merchant to manage his or her own communications, as well as empowering the customer to engage directly with the merchant. This is not the way it’s done throughout e-commerce, even today. Many small merchants have signed on with our competitors to gain access to the global Internet marketplace. But these major e-commerce players control much of the process, not the least of which is the communications avenue. All communications funnel through the e-commerce platform.

From web-page design to email to relationship management, we seek to be an empowering rather than a controlling force. The early Internet mall developers were certain that their merchants would not be able to handle life in the virtual marketplace. They were convinced that merchants needed structure, control, and limits. But they were wrong, as evidenced by the failure of so many Internet malls at the outset. Their need for control backfired. It wasn’t profitable for the merchants, and it interfered with their long-term goals.

But when empowered by a virtual mall owner, retailers thrived. The rice merchant is a perfect example. Rakuten didn’t just take him on as a client; we empowered him to be successful as a merchant, as a father, and as the custodian of his family’s history and traditions. And he was far from our only example.

Excerpted From Marketplace 3.0 by Hiroshi Mikitani. Copyright © 2013 by the author and reprinted by permission of Palgrave Macmillan, a division of Macmillan Publishers Ltd.

--Hiroshi Mikitani is the CEO of Rakuten, a global leader in e-commerce. Follow him on Twitter at hmikitani_e.

[Image: Flickr user Ed Sweeney]

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