Over the course of the past two years, as an investor at dunnhumby Ventures, I have spoken with dozens of startups, from Boston to Beijing, all innovating in the indoor location space. Given our fund’s focus on disruptive retail technologies, this space was of high interest to me. iBeacons are going to be the next great technology, right? They will enable retailers and brands to interact with you at the exact right moment, when the likelihood of conversion was the highest, right? In theory, yes. The challenge is not the desire to know this information, it’s the ROI of knowing this information and the insights necessary to make that message relevant.
iBeacon technology is the highest profile of the location technologies, but other tech, such as Wi-Fi, phone sensors, light bulbs, sound waves, and even electromagnetism, have emerged with similar goals of tracking a specific user, indoors, with relatively high location proximity. Camera tracking is another technology used to track user movement in-store but is generally focused on store operations and does not engage with the consumer. For this reason, I am leaving it out of this discussion — different budget, different problem.
The math problem
Given that these technologies rely on a mobile application to facilitate the communication to the consumer, startups in this space have set their sights on retailers with a significant app user base, or more broadly, retailers large enough to build a significant app user base in the near future.
This refined focus has considerably shrunk the market opportunity for these companies and forced them to go “elephant hunting.” And they have priced their product accordingly. Smaller market opportunity means they need to price high in order to be financially sustainable. Herein lies the challenge; what is the dollar value of knowing a consumer is standing in front of the beans at a grocery store? Is a push notification that the beans are on sale going to do a better job of converting me than the bright yellow tag in red lettering, stating that the beans are in fact on sale? Maybe. But unless that message can be tailored to each person individually, that’s a fairly challenging ROI to prove, and at the moment, few in the space have the data necessary to make that calculation.
This is the number one reason many in this space have failed to move beyond the “test store.” The ROI of knowing the consumer’s exact location in-store simply isn’t there at the moment.
Asking customers to run before they crawl
Retailers have a tendency to be late adopters when it comes to technology that engages with the consumer and rightly so. The retailer/consumer relationship is a delicate one and is not to be handled lightly. For that reason, many are just now developing an app and, in many cases, are looking for ways to increase user adoption. Asking them to systematically target that user base in-store is a big leap.
Many don’t have the resources or appetite to move on this capability in the short term. Especially given the math problem stated above.
I still believe in the technology — heck, I’ve invested in it — but many in the space will need to pivot in order to win. First, you need to broaden your market opportunity by focusing on one-beacon deployments or, in many cases, no-beacon deployments. A properly placed iBeacon at the entrance of a store is the perfect starting point. A simple “Welcome back” or reminder about current promotions as the consumer enters the location is more than sufficient. You do not want hardware installation or setup costs to be a reason not to deploy. Given the high switching costs, embedding your SDK into their app should be your sole focus. Removing many of the setup costs on the hardware side is one less obstacle to overcome.
Next, you need to be more creative in regards to use cases. Almost every startup I spoke to had retail as their largest market opportunity. Test verticals and stand out from the noise. There is tons of opportunity in banking, transportation, and live events with a potentially greater need and significantly shorter sales cycle.
At the end of the day, it is about user engagement. If the data needed to make push notifications relevant on a 1:1 basis isn’t available, granular location data isn’t going to move the needle.
2016 is going to see a number of in-store solutions companies succumb to the long sales cycle and challenging ROI. However, those who pivot and listen to what the market is telling them have the opportunity to flourish. The tech isn’t going away, the outcomes just need to be repositioned in the market in order to grow.
Kyle Fugere is an investor at dunnhumby Ventures (dhV), the investment arm of dunnhumby, where he focuses on early stage retail technology investments. He is a 2x founder in the technology space before transitioning to venture capital with stints at Tollman Capital Partners before moving to dhV. He is a frequent writer on the subject of startups and venture capital. You can follow him on Twitter @kfugere.