June 30, 2006, 12:00 AM

Weighing spending options

The Internet Retailer survey asks e-retailers about their plans to buy e-commerce-related technology and services.

By Mark Brohan

With the web retailing industry expected to grow this year by more than 25%, online merchants across the board are purchasing more e-commerce hardware, software and services to keep pace with rising customer demand and consumers’ rising expectations. But unlike the days before the dot-com investment crash, when many retailers went overboard in purchasing technology, merchants in 2006 are being more selective in how they are spending their technology resources, focusing on underlying platforms and site performance, according to the latest Internet Retailer web survey.

The survey, which included responses from about 175 chain retailers, catalog companies, web-only merchants and consumer brand manufacturers, finds that 79.3% of all companies taking part in the research will purchase more hardware, software and services this year than last. Not surprisingly, consumer brand manufacturers, the group trailing other web retailers, is the category most likely to increase spending, with 89.1% expected to purchase more e-commerce technology this year, followed by 79% of chain retailers, 79% of catalogers and 77% of virtual merchants.

A consistent rate

The survey was e-mailed in early June to all subscribers of IRNewsLink, the magazine’s newsletter, and all responses were collected and analyzed using Internet survey technology from WebSurveyor, which has partnered with Internet Retailer in a series of monthly surveys of the e-retailing industry. Overall the survey reveals that 49% of all retailing organizations expect to increase e-commerce spending this year at a rate of between 6% and 19%, with only 13% anticipating an increase in spending of less than 5%.

By category, the survey findings also show that some companies are planning to spend significantly larger amounts on Internet and e-commerce applications and services. For instance, 14% of virtual merchants expect to spend as much as 50% more on upgrading their e-commerce platforms and digital marketing programs, followed by 11% of chain retailers, 6% of consumer brand manufacturers, and 5.3% of catalogers. Further, 11.1% of pure-play retailers will spend at least 25% more on technology this year, compared with 10.5% of catalogers and 3% of brick-and-mortar retailers.

When web retailing began more than a decade ago, many companies spent freely on a wide variety of technical applications and third-party services in order to acquire customers and launch a business. But these days, the Internet Retailer survey shows that most web merchants are carefully studying their technology purchasing priorities and, first and foremost, purchasing technology that improves web site performance and customer retention. For example, 51% of all organizations say that replacing their e-commerce platform is their top priority, followed by 48.7% that list a web performance monitoring tool or service as their next most important purchase. Spending on programs that increase site search and help to measure customer behavior also will increase this year, with 38.5% citing a new search application as their third most important spending priority, followed by 31% that are planning to update or replace their web analytics program.

Timing remains a key factor in most retailers’ e-commerce technology purchasing plans this year, particularly for big-ticket applications such as a new e-commerce platform. The Internet Retailer survey found that 56.4% of all companies looking to replace or upgrade their e-commerce platform expect to do so within the next two years, with 22% swapping out their old system within six months. Web retailers also will be aggressive in their timetable for acquiring new site search programs and order management systems. A total of 55.6% of companies in the market for a faster search tool or service will buy a new system within two years, while 25% expect to install a faster internal search engine within the next year and 14.5% within six months.

Delivering results

Retailers are especially likely to upgrade, replace or install a technical program or service if the end result will help to deliver faster order processing, higher sales conversions and more satisfied shoppers. For instance, 17% of all retailers in the survey expect to replace their shopping cart software by late this year or early next year and another 21.2% will update their shopping cart within 24 months. Web analytics purchasing also appears poised for an increase. While 55.2% of web merchants don’t know or have no plans to purchase a better web analytics application or service, 21.3% expect to invest in more advanced web analytics, within six months and another 8.6% within one year.

Retailers clearly are placing an emphasis on spending their resources on upgrading or replacing e-commerce applications that drive traffic and retain customers as opposed to tools that improve the design and content of a web site. The survey finds that only 30% of online retailers are using rich media tools and only 36.4% are likely to buy rich media applications or replace current applications within a year. Retailers also are less likely to invest in content delivery networks to deliver streaming media and larger files of downloadable information to their web shoppers. The Internet Retailer survey found that 55.1% of all web merchants don’t use or have no plans to replace their current content delivery network, compared with 16.7% who expect to add a network or service within 12 months.

Web merchants also like doing business with their present service providers, particularly for payments processing. The survey found that 61% have no plans to replace their current payments processor, compared with12.1% who expect to make a change within six months.

Investing in a new e-commerce application or service certainly isn’t inexpensive –annual software license for a new e-commerce platform can easily cost a small retailer as much as $100,000, while a bigger or more robust system can range from $200,000 to well over $500,000. Outsourcing an e-commerce operation is also a multi-year commitment that can cost a major retailer millions of dollars a year in third-party fees.

Do-it-yourself

As a result, the Internet Retailer survey finds that many web retailers are weighing their outsourcing decisions carefully and will continue to operate most programs internally. For instance, 75% of retailers taking part in the survey manage their own order fulfillment and only 7% expect to replace their current service provider within six months.

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