In its second-largest acquisition, Amazon buys the company for $970 million.
In an uncertain economy, e-retailers are taking sharper aim at technology investments to make sure they hit the bull’s-eye.
Technology spending plan for 2009: Think it over hard, take two aspirin, give it another look in the morning, then spend wisely. Just ask Drugstore.com Inc.
Coming off two years of substantial investments in technology, the web-only retailer is being much more selective this year. It’s passing on some bells and whistles to focus on projects it’s sure will quickly improve the online customer experience and increase conversion rates.
“While we want to have newer whiz-bang things on our platform, we also have prioritized profitability and cash flow,” says David Lonczak, who as chief marketing officer plays a direct role in planning technology projects.
What’s on hand
Instead of investing in new blogging and other social networking applications, for example, Drugstore this year is investing in taking advantage of functionality in its recently deployed Microsoft ASP.net e-commerce platform, Endeca site search and navigation system, and Omniture web analytics. “It would’ve been great this year to get into blogging and do more community applications on our sites, but we want to generate more revenue out of our past technology investments,” Lonczak says.
Drugstore, which is also scrutinizing applications it figures can bring immediate payback such as product recommendation technology, isn’t alone in taking a harder look at technology choices in light of the economic downturn. Several retailers of different types and sizes say that while they continue to invest in e-commerce technology to leverage the relative strength in the online channel, they’re taking extra steps to figure return on investment and ensure they’re choosing the best options among applications and vendors. Sometimes the best option is making better use of technology already on hand.
“This year has been more challenging,” says Melissa Rothchild, vice president of CPA2Biz Inc., an online retailer of professional and educational products to accountants. Before deciding to go with new applications this year, she adds, CPA2Biz spent more time in contract negotiations and took a harder look at expected ROI than in the past.
There’s simply less room for experimentation, retailers say. “In years past, we had more of an R&D; cushion to try new technology,” says Steven Conine, chairman, chief technology officer and co-founder of CSN Stores Inc., which does more than $200 million a year through more than 200 niche web sites that mostly sell home furnishings, a category hit particularly hard by the fall-off in home sales. “Now if we’re doing something, it has to pay off quickly. We’re trying to improve our conversion rates and average order ticket.”
Eye on online growth
While many companies are examining technology spending requests more closely, few are cutting e-commerce technology budgets, says Brian Walker, senior analyst for e-commerce technology at Forrester Research Inc. In a survey conducted last December, Forrester found that 72% of companies said the economic downturn had not led them to alter their e-business technology investment plans, and that more than half of business-to-consumer companies said they planned to increase their budgets for e-business technology.
Companies are still bullish on e-commerce technology investments because they recognize the power of the online channel, Walker says. Forrester estimates that online retail sales will grow 11% this year over 2008, far faster than total retail sales, then grow at a more robust clip next year. Others are less optimistic, however. For instance, comScore Inc. estimates e-commerce sales will grow in single digits in 2009, roughly in line with the 6% online sales growth comScore estimates for 2008.
But e-commerce investments are not being driven solely by online sales, Walker says. He says successful retail e-commerce sites have become crucial to successful store retailing. Although direct online sales account for only 6% of total retail sales, 75% of consumers routinely research products on retail web sites before making offline purchases, and by 2013, 40% of total retail sales will be initiated on the web, Forrester predicts.
“E-commerce managers still don’t have a blank check to buy technology, but for most companies e-commerce technology is not an area to be trimmed,” Walker says.
The best metrics for determining a positive return and measuring customer satisfaction, Walker says, are shopper-to-sales conversion rates and average order size. “It all comes down to orders,” he says.
Indeed, that’s what Drugstore expects to achieve by continuing to invest internal resources into developing its Microsoft ASP.net e-commerce platform, Lonczak says. When looking to upgrade the Microsoft platform it had used since 1998, Drugstore considered major commercial platforms but decided that it could get the kind of customization it needed more cheaply by migrating to the new-generation ASP.net technology, which is designed to make it easier to integrate with new applications.
Part of Drugstore’s growth strategy, for example, is continuing to build out its number of SKUs with new products like its new Bare Escentuals cosmetics line. And one of its key methods of generating orders, Lonczak says, is offering a gift-with-purchase feature that can offer a gift from sources other than Drugstore itself-for example, a free Yoga DVD from Zenzations with the purchase of a Yoga exercise mat. Another feature effective at driving orders is a 5% cash-back offer that shoppers can apply to future purchases on Drugstore.com or its sister cosmetics site Beauty.com.
Such features require the flexibility to customize that Drugstore has in its existing ASP.net platform. “When we assessed the capabilities of commercial platforms, they were great, but when we looked at the customization work we’d need, we could easily spend tens of millions of dollars,” Lonczak says.
At the same time, Drugstore is working with other technology suppliers to improve various aspects of its e-commerce operations. It’s continuing to develop personalized product offers through Omniture’s Test & Target application, deploying online video with image management tools from Liveclicker, and seeking to better serve foreign consumers with E4X Inc.’s FiftyOne application, which renders Drugstore.com’s prices in the local currencies of 34 countries and handles international order fulfillment and shipping. It’s also testing two versions of product recommendation engines.
Enhancing its web sites while keeping a close eye on costs has helped Drugstore meets its financial performance goals. Despite the industry-wide fall-off in the online sales growth rate, Drugstore recorded its first profitable period in last year’s fourth quarter.