Online marketing once was a savior for small companies, allowing businesses with limited budgets to reach a new world of consumers via banner ads and keyword searches. But marketing on the Web isn't what it used to be. A large number of search engine clicks are fraudulent. And competition from large, deep-pocketed marketers has driven up prices, pushing smaller companies to the margins.

Fortunately, there is a new alternative for online marketers, one that combines elements of yesterday's killer app, the search engine, with the best parts of today's, social networking. Known as "social shopping" sites, these services combine the networking power of MySpace with the data-crunching muscle of Google (NASDAQ:GOOG), and in the process bring a little more humanity to the act of shopping online.

What's different about social shopping? For all its power, Google can't tell shoppers what's cool or what their friends or like-minded consumers recommend. Social shopping sites, on the other hand, do just that--which provides new opportunities for small online retailers to reach consumers. A search for "men's shoes" on a typical search engine, for example, yields the most prominent brands and retailers within the first few pages of results. The same search on a social shopping site not only displays a wider array of smaller, and arguably cooler, brands, it points users toward the haberdashery recommended by the site's most fashion-conscious and influential users. These sites are geared to consumers, not marketers, so you have to tread carefully. Still, a single recommendation from a well-connected and influential user can generate considerably more visibility than many marketers could achieve on Google or Yahoo (NASDAQ:YHOO) --and, even better, it's free. On the major search engines, "it can be all but impossible for small retailers to percolate to the top of the search process," says Sucharita Mulupuru, a senior retail analyst at Forrester Research (NASDAQ:FORR). "There's no question that social shopping could be hugely beneficial to small businesses."

The medium has proved perfect for Alex Kump, co-founder of Topo Ranch, an apparel manufacturer based in Venice, California. Topo Ranch gears its T-shirts, fleeces, and jackets toward young, active consumers, who can be resistant to traditional marketing. And the start-up does not have much of an advertising budget; it gets most of its new customers via word of mouth.

Last August, Kump discovered ThisNext, a social shopping site geared toward design-centric consumers. After perusing the site, Kump decided it might be fun to post his own "Shopcast," the term ThisNext uses to refer to the personal lists of product recommendations that members post. Kump's Shopcast included an Ikea bookcase, the board game Scrabble, Niman Ranch bacon, and his own Topo Ranch hooded sweatshirt. That simple act managed to expose Kump's brand to thousands of potential customers, many of whom clicked through to Topo Ranch's website. The result of this zero-cost, ad hoc marketing? Since Kump began posting on ThisNext, the company's daily Web traffic has increased by almost a third and sales have risen 165 percent. "This is an opportunity to express what the Topo Ranch lifestyle is," says Kump. "All of a sudden, I'm not just making pants, sweatshirts, and clothing, I'm giving you a lifestyle that's made up of my favorite bands, my favorite board games, my favorite shoes, and my favorite furniture."

The idea behind social shopping sites is that online shopping, however efficient and easy, has almost nothing to do with the way people actually like to shop. In the real world, people make shopping an event; they do it in groups, they browse, share recommendations, and search out reviews by trustworthy experts. Indeed, even though online shopping remains largely a solitary act, 60 percent of U.S. adults who plan to shop on the Web viewed recommendations from friends and family as the top factor when choosing a small online retailer for holiday gift buying, according to a November 2006 poll from Yahoo and Harris Interactive (NASDAQ:HPOL).

This type of collaborative behavior has not gone unnoticed by large corporations. In 2005, Yahoo launched Shoposphere, its own version of social shopping, and in June eBay (NASDAQ:EBAY) partnered with the social shopping site Kaboodle to launch a service aimed at collectors called My Collectibles. Such activity does not surprise Gordon Gould, who co-founded ThisNext in September 2005 and now serves as CEO. "The search engines have spent the past decade educating people to think that they have to know what they want in advance when shopping online," he says. "But there's a whole swath of consumer behavior that's been well established since time immemorial that just doesn't get serviced online."

To facilitate collaboration and spur-of-the-moment purchases, Kaboodle, which launched in February 2006, lets shoppers with similar tastes form their own shopping squads, within which they trade recommendations and post messages. Groups such as the 45-member "decor and design" group, for example, have their own lists of their favorite home decorating products.

Tony Rekhi, owner of WineGlobe in Redwood City, California, began encouraging his customers to make lists on Kaboodle in July. "We were able to see a 10 to 15 percent increase in our conversion rate without spending a single dollar," says Rekhi. That compares with a return of just 1 to 3 percent on marketing campaigns like a bimonthly newsletter and paid ads on Yahoo.

Though most social shopping sites remain small, they are beginning to establish a presence. As the sites have grown, some have had to police their own communities. Manish Chandra, CEO and founder of Kaboodle, says that he's already taken action to keep intrusive marketers out of the site. Social shopping sites, says Chandra, represent a new challenge to brand marketers and retailers. "You can't just treat this as a pure merchandising exercise," says Chandra.

But approach the medium correctly, and you could end up with a small army of volunteer brand evangelists. The site Stylehive actually ranks users within areas of expertise based on the number of users who've followed product recommendations, and it allows users to track their favorite recommenders. Crowdstorm points out what it calls the "buzziest product." ThisNext, for its part, ranks users based on an internal "interestingness" algorithm, a proprietary formula that Gould thinks will allow ThisNext to target consumers making the most influential recommendations. "Not every consumer is of equal value," says Gould. "What we are setting out to do is to quantify influence for the first time."

Published on: Feb 1, 2007