Rakuten’s CEO on Humanizing E-Commerce

The Idea: Mikitani believes that human beings need communication and connection. So instead of emphasizing efficiency and convenience, Rakuten tries to create a personalized, bazaarlike shopping experience. I can still remember the first time I made an online purchase: It was in October 1996. I bought Japanese noodles from a small shop in Shikoku. The checkout process was primitive, but my order arrived in the mail, and it was as good as everyone had said it would be. I realized immediately that online shopping would be commonplace someday. At the time, I was already planning to launch Rakuten. Our website went live about six months later, in May 1997. My goal was simple: We would offer small and midsize merchants an opportunity to set up shop on the internet very easily. We would charge them a set monthly fee, and they could pay extra for advertisements and promotions. Our approach to e-commerce is quite different from that of Amazon and many other companies. I think of those competitors as vending machines: They are hyperefficient supermarkets with standardized offerings. That’s not an approach that excites me. I believe that human beings need communication and connection, and that shopping should be a rich experience. I feel this way in part because of my heritage. If you go to a supermarket or a McDonald’s in Japan, you’ll find an extremely high level of hospitality and customer service—in contrast to the atmosphere in most Western markets, where customers are much more focused on speed and convenience. The personalized approach is really in my blood. I didn’t want to create a superstore; I wanted Rakuten to be more like a bazaar, where the owners of many small shops would curate the merchandise and interact personally with customers. I believe that is the kind of experience many people prefer—even if they’re shopping online. This approach has worked well for us. Today Rakuten is the world’s third-largest marketplace for e-commerce, behind Amazon and eBay. We have nearly 10,000 employees, and we operate in 13 countries. Last year we sold $15 billion worth of goods globally, and in our home market Rakuten is by far the dominant online retailer in a host of categories, including apparel, food, and household goods. Newer online retailers, such as Fab and Etsy, are imitating our model. Rakuten Facts & Figures Founded: 1997 Headquarters: Tokyo Employees: 9,892 Number of Merchants in Japan: 41,145 Source: Rakuten; Note: Rakuten’s financial reporting has changed: Japanese GAAP figures apply to 2008–2010; IFRS figures apply to 2011–2012. Off the Traditional Path My decision to launch Rakuten began in an unusual way. In 1995 the Hanshin earthquake struck western Japan, devastating the city of Kobe, where I had grown up—and where my parents and other relatives still resided. I remember desperately searching for my aunt and uncle after the quake; I finally found their bodies at a local school that had been converted to a temporary morgue. I realized in those days how tenuous our existence is; we have only one life, and it must be lived to the fullest—not someday, but now. At the time, I was 30 years old and working at the Industrial Bank of Japan in Tokyo. That’s an extremely prestigious company, and one that very few Japanese would be willing to leave. In my country, entrepreneurship is not the norm for someone with a good university education. The traditional path is to secure an entry-level job at a reputable company and work your way up through the ranks over a lifetime. But I’d been exposed to entrepreneurship from an early age. As a teenager I’d lived in the United States while my father was a visiting professor at Yale, and later I studied at Harvard Business School. I’d learned that it doesn’t matter how big your employer is—what matters is how much value you yourself create. This view is the opposite of how success is seen in Japan, and my family was shocked when I said I was leaving my job in banking. But I knew it was the right decision. When we launched, companies were just beginning to sell over the web. Amazon had already opened, but it was selling only books. Some companies began setting up “online shopping malls” that would allow many merchants to sell goods via a single website. IBM had opened one called World Avenue, with brands such as L.L. Bean, Hudson’s Bay, and Gottschalks. But the model proved tricky, and IBM discontinued the project after a year because its merchants complained that there was too much IBM branding on their sites and that IBM wasn’t an effective intermediary between the retailers and the customers. At Rakuten we offered a different model. We charged $650 a month to set up a store—a small fraction of what the big internet malls were charging. We allowed merchants to customize their web presence rather than fit into something we had designed. We encouraged them to interact directly with customers, because we’d found that merchants who told their personal stories and made a connection with shoppers did very well. Sizing Up the Boutique Approach Personalized selling works better in some product categories than in others. In Japan, Rakuten leads in many categories, but Amazon does very well in books and electronics. Source: Rakuten Chick Diary This happens even with unexpected products. Soon after we started, I was approached by a farmer who wanted to sell fresh eggs online. I thought it was a terrible idea. Eggs are fragile—and when it’s so easy to buy them at the supermarket, why would anyone buy them online? The farmer said I was missing the point. The eggs at a supermarket are already at least a week or two old, which isn’t exactly fresh. His eggs are organic; he feeds his chickens a special diet to make the eggs really rich; and he would ship them overnight, ensuring freshness. So he opened a store on Rakuten. I think he was our 100th merchant. He started a daily chick diary to let customers know how the chickens were doing. He posted photos of a quality test he’d devised: He would stick a toothpick into the yolk of an egg, and if the yolk was firm enough to hold the toothpick upright, that meant the egg was of superior quality, so the batch was good to sell. He told stories that made people interested in trying his eggs, and once they bought from him, they kept buying—at a premium. This approach works really well in certain categories. Rakuten merchants sell more than 10% of all the wine sold in Japan. They sell cars. They sell a lot of art. Recently they’ve started selling houses. Food is a really big category, even though nobody believed when we launched that food would become a mail-order business. Expensive chocolates are a very large category on Rakuten, and so is clothing—70% to 80% of what I wear most days was bought on the site. The curators running our shops will become like friends to you and will give you personal recommendations. Humans Plus Algorithms When people talk about “social shopping” or “social commerce,” they’re referring to the fact that people like to connect with others for advice about purchases. Some people think that friends—whether in real life or on social media—have a big influence on what we buy. I don’t believe they’re that powerful. The curators running our shops know quite a bit more about products and are a much better source of recommendations. If you want to buy a tennis racket, do you ask a friend or the pro at the shop? If you want to learn about wine, do you ask a friend or a sommelier? Over time the professionals at these shops will become like friends to you and will give you personal recommendations. Other companies use algorithms to drive recommendations, but a human being’s recommendations tend to be more effective. I think a hybrid approach works best. Rakuten has many PhDs who work with big data and analytics, and we have a state-of-the-art research lab. But we believe that a shopkeeper’s recommendation is fundamental. A human being can listen as you explain your needs and can tell you the stories behind the products you’re considering. Our prices are really competitive, because instead of one price across our website, we have individual merchants who are competing against one another. Price is important, but many shoppers aren’t supersensitive to small differences, particularly once they have established a relationship with a merchant. Sometimes price is less important than design and passion, for instance. One potential downside of offering a decentralized marketplace with goods from thousands of merchants is that quality or service problems may occur. But Rakuten has found ways to avoid this. We have a tight screening process for people who want to open a store on our site. We monitor transactions. We have a survey program that allows customers to give feedback on shops, and if a shop consistently receives poor ratings and cannot improve, we’ll kick it out. If goods don’t arrive, we offer a refund. I think many other web players could learn from our approach. Look at the big travel websites in the United States, such as Expedia, Priceline, and Travelocity. They are standardized and very process-oriented. They’re designed so that someone can quickly type in some dates and a destination and then make a reservation. Travel websites in Japan are quite different. They’re set up so that hotels can edit their pages themselves and tell their own stories. That allows the hotels to make a connection with customers. It’s the same thing with golf courses. Customers use Rakuten to make reservations for approximately 10 million rounds of golf a year in Japan, and they choose where to play on the basis of the storytelling and the expertise of the golf pros who describe the various courses on our site. Fab and Etsy offer either a highly curated selection of merchandise or handcrafted goods that are highly personalized, so the buyer feels that he or she is dealing with a human seller. EBay has been heading in this direction as well. That’s not surprising. Why do people shop in small boutiques? Because they want a personal connection and a superior level of service. Good prices, efficiency, speed, accuracy—those things are definitely important, and we provide them. But if we can also provide communication and interaction and a story behind the products, it becomes a win-win relationship.

Rakuten’s CEO on Humanizing E-Commerce

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