inStore Online

A new shopping site fits the AOL strategy, but faces challenges in a competitive market

With its declining subscriber base, America Online Inc. has been looking for ways to boost revenue. Among its approaches: providing web sites accessible to a broader base of Internet users beyond subscribers.

That’s the thinking behind AOL’s launch of shopping comparison site inStore last September. It follows the same model as the successful MapQuest.com, which to Internet users has become synonymous with finding directions to anything anywhere in the country, and ticket site MovieFone.com.

But whether inStore can attract new audiences and revenue for AOL is a big question mark. And, in fact, AOL itself downplays inStore’s role in boosting revenues, saying it just wants to give members the best possible shopping experience. “It’s not a significant revenue play for AOL at this point,” says Bob Hayes, AOL’s vice president and general manager of e-commerce.

Low profile

Indeed, inStore carries such a low-profile there’s no mention of it in earnings reports of AOL’s parent, Time Warner Inc., even though MovieFone.com and MapQuest.com both merit mentions, or in stock analysts’ reviews of the media giant’s performance.

AOL’s biggest problem is its dwindling subscriber base and the resulting loss of subscription revenues. AOL ended 2004 with 22.2 million U.S. subscribers, down from a peak of 26.7 million in 2002. Domestic subscription revenues for the year dropped $370 million.

To offset the loss of subscription fees, AOL increasingly is focusing on generating advertising revenues. Ad revenue topped $1 billion in 2004, up 28% from 2003, representing 11.5% of AOL’s total 2004 revenues of $8.7 billion.

That’s where inStore comes into play. It’s open to any web user and replaces the Shop@AOL service that not only was limited to AOL subscribers but also was panned by users as not very useful. By opening inStore to all comers, AOL hopes to drive more traffic to the site, making it more valuable to both retailers and advertisers.

InStore relies heavily on multiple marketing models for revenue, Hayes says. Those include slotting fees, in which a retailer pays AOL to hold open featured positions on the inStore home page on a certain date. In other cases, retailers pay inStore on a cost-per-click basis, and in others, the retailers share revenue with AOL.

In-network advantages

Analysts say AOL brings some advantages to the market that other shopping sites do not have. For one thing, analysts say it can produce customers at a lower cost than other sites, because AOL can direct users from AOL to inStore. “They can use the AOL network where they can have free advertising to drive customers to the site,” says Carrie Johnson, principal analyst at Forrester Research. “Shopping.com and Shopzilla rely on the search engines or other paid deals online to get traffic, so their costs are fundamentally higher.” Its potential lower cost of advertising also carries the side benefit that AOL should be able to charge retailers a lower cost per click than competitors, analysts say. AOL also uses search engine marketing to promote inStore.

Another advantage that AOL possesses is parent Time Warner’s other online properties. AOL runs banners and promotions on Time Warner sites that have a natural tie-in to inStore retailers, Hayes says. For example, Time Warner’s Southern Living magazine site might carry a banner promoting an inStore retailer in the furnishings category.

But those marketing efforts have yet to produce the critical mass needed to make the site profitable, Hayes says. Since inStore launched in September, it has averaged 6.3 million unique visitors per month, AOL says. It peaked in December at 11.9 million unique visitors.

But between September and March, inStore experienced a 1.43% drop in visitors, the only comparison shopping site to experience a drop for the period, according to comScore Media Metrix. Traffic to the shopping comparison category itself was up 60% during that period (see box).

Hayes attributes inStore’s drop in traffic since its launch to consumers’ unfamiliarity with the new site. But even though consumers had trouble finding inStore, once there, they spent twice as much time at the site as they did at Shop@AOL, Hayes says. “Our page views doubled over that period, and the time spent at the site increased by roughly two minutes,” Hayes says. “Once they were there, the content, the layout and the design held them far longer than our previous site.”

Better conversions

At the same time, shoppers converted better with each of the retail partners, Hayes says. “We had a higher conversion rate, a higher average order value, and the retailers from the big and the small alike echoed that claim all the way and still are echoing it today,” he says. Hayes, however, would not provide details on conversion rates and average order value.

Forrester’s Johnson says her interviews with retailers indicate they are experiencing a lift at inStore. “It doesn’t have the functionality of a Shopzilla or a Shopping.com, but many merchants have said the traffic they get is valuable and is converting at a good rate,” she says.

Because consumers self-select, more qualified shoppers ultimately see the various retailers’ offers and therefore are much more likely to make a purchase, says Hope Gurion, director of retail and e-commerce.

To make shopping at inStore easier for consumers, AOL limits its merchant partners to 75 select retailers, rather than the 250 merchants that partnered with Shop@AOL, Gurion says. “We really wanted inStore visitors to have a great experience, so we partnered with brands they know and love,” she says. Merchant partners include Nordstrom Inc., Neiman Marcus Group, Office Depot Inc., Best Buy and The Gap.

Visitors to inStore also have access to another 50,000 merchants and 25 million products through the Pinpoint Shopping search tool, powered by BizRate.com, now known as Shopzilla.

A long history

Pinpoint combines Shopzilla’s platform, which weighs price, popularity and availability of products against the reputations of merchants, with AOL’s own shopping technology, which is driven by features-filtering, remembering capabilities and alert features. BizRate manages the content, the core comparison shopping search platform and the monetization of the merchant links within AOL’s Pinpoint shopping. It also handles the process by which retailers bid for search placement and are billed for clicks. “We wanted to partner with a company that had a long history in the space and could offer our shoppers a comprehensive catalog of merchants and products,” Gurion says.

Pinpoint Shopping is the centerpiece of the inStore site because it allows consumers to compare features and prices of millions of products from thousands of online merchants, Gurion says. Pinpoint’s predecessor, AOL Shopping Search, searched only the sites of AOL’s 250 retail partners. Pinpoint also enables shoppers to search for products across the entire web, she says.

That comparison function brings more value to both AOL subscribers and non-subscribers, says Patricia Freeman Evans, retail analyst at Jupiter Research. AOL subscribers had complained that Shop@AOL was just a collection of banner ads. “InStore has given them a more robust shopping comparison service, rather than the advertising-oriented environment they had,” she says. “It still will have an ad component to it, but they now have the additional benefit of the comparison engine.”

As with other shopping engines, the Shopzilla application at inStore sorts search results. For example, a search for a dishwasher produces not only appliances but also dishwasher-safe food processors, dinner and cookware. InStore also provides a Remember It function, which stores viewed items to a shopping list. It is very much like Shopzilla’s Shopping List, with the exception that inStore shoppers have to register to store products while Shopzilla shoppers do not. Shoppers in both can simply store items or compare items.

Despite these features, inStore doesn’t have the extensive reviews of both products and retailers as do sites such as Shopzilla and Shopping.com, putting inStore at a disadvantage, Johnson says. “Certainly, the more established players have more to offer both consumers and retailers just because they’ve had more time to develop their sites,” she says.

High hopes

AOL has high hopes for inStore and expects a majority of its 75 merchant partners to renew their agreements for another year, Gurion says.

AOL will continue to add features to meet the needs of both users and retailers, Gurion says. “We’re constantly evolving, both from a product perspective and from a user perspective,” she says. “Shopping behavior online changes constantly, so we’re trying to anticipate what users want and deliver an experience that matches that behavior.”

If inStore is not a resounding success yet, it’s a start, analysts say. “AOL struggled in the last couple of years to get relationships and the selling environment right for retailers,” Johnson says. “InStore is the closest they’ve come to satisfying retailers’ needs for qualified leads.”