In E-Commerce, Small is the New Big

By CIOinsight  |  Posted 01-06-2006 Print Email
McDonalds' started taking credit and debit cards for purchases as small as $1 to make customers happier and attract a little new business. But it's had other benefits, too, benefits that show the $1.3 trillian U.S. market for items less than $5 is ready t

In January 2003, Jim Cantalupo, then the CEO of McDonald's Corp., found himself in unfamiliar territory. For the first time in 47 years, the $19 billion burger company had posted a quarterly loss. Consumers were fed up with the long lines and lousy service, and Cantalupo admitted in his annual letter to shareholders that "McDonald's has lost what it takes to make customers feel special."

As part of a new strategy, dubbed "Plan to Win," Cantalupo quickly outlined the Oak Brook, Ill.-based company's comeback, with technology taking a lead role. Within a year, in addition to introducing new salads and breakfast sandwiches, the company had rolled out a new payment option that allowed consumers to buy everything from Big Macs to French fries with credit and debit cards—even if the purchase was just $1. "It was a natural move for us," says Gina Pfeifer, vice president of business integration for McDonald's USA. And it was a successful one, too: The cashless system shaved an estimated seven seconds off each transaction, speeding up the line, and aiding McDonald's in serving 1.6 million more customers per day in 2004 compared with 2003. Analysts say the company's average sale rose from $5 to $7. In 2004, McDonald's enjoyed its highest sales increase in 17 years, and earned $2.3 billion.

That McDonald's was even able to offer credit-based transactions for such small amounts signals a fundamental shift in the evolution of microcommerce, a loosely defined term that generally refers to any sale totaling less than $5. Historically, cash has been king of these small sales, largely because credit card companies charge merchants too much in fees to make the transactions profitable (due to its size, McDonald's was able to negotiate smaller fees with its credit card networks). But cash doesn't work over the Internet, and all prior attempts to disintermediate cash and credit cards for online transactions resulted in miserable failures: Anyone remember Flooz? Beanz? DigiCash?

Meanwhile, microcommerce continues unabated: Americans spent $1.3 trillion last year on purchases that cost less than $5, and 99 percent of that was paid for with cash, according to the TowerGroup. Now, the credit card companies, the most dominant payment method on earth, want a piece of the action. So a variety of new technologies that work with credit cards, not against them, and a new willingness on the part of the credit card companies to reconsider their fee structures, are combining to enable new business models and profit centers based on very small transactions.

All of which means that some of the irrationally exuberant business models conceived during the 1990s may finally come to pass. Goodbye subscriptions, hello pay-per-page-view. Buying stamps online? No problem. In fact, Gartner Inc. predicts that by 2015 the average American will make more than 20 micropurchases on a credit or debit card each month. That means big money off small payments for businesses of all sizes—if they can figure out how to make it work.



 

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