Making the software-as-a-service option pay off for online retailers
by Paul Demery
Apparel and home fashions retailer TJX Companies Inc. is testing an e-commerce presence through its subsidiary TJX Europe, selling handbags online through its U.K.-based TK Maxx brand.
The new retail site, TKMaxx.com, marks the first retail e-commerce presence for TJX Companies since it closed the U.S.-based TJMaxxHomeGoods.com in 2005, at the time citing the site's inability to operate in a cost-efficient way.
Launched in May on a software-as-a-service platform from Venda Inc., TKMaxx.com is still officially a test. The retailer wants to see how the new e-commerce site fits with the company's business model of offering a quickly changing array of fashionable merchandise, says Julian Baker, vice president of marketing for TK Maxx in the U.K. and Ireland.
The company's business model is to acquire fashionable merchandise in excess assortments at low prices from manufacturers as well as retailers and other sources, then quickly sell it while passing on the savings—up to 60% off original retail prices—to its customers.
In closing its sole e-commerce operation four years ago, TJX Companies had decided that its stores were better suited to support that fast-moving-inventory model.
Although that store-based model appears to be working well—with its lean inventory strategy, net income rose 8% year over year to $209.21 million for the first fiscal quarter ended May 2, while net sales rose only 1% to $4.35 billion—TJX Europe is testing e-commerce with TKMaxx.com in an effort to expand on that strategy via the web.
Sold on SaaS
The retailer's software-as-a-service platform, which Venda provides at a fixed fee of $12,000 per month per web site with no additional set-up fees, enabled TK Maxx to get up and running in four months with a cost-effective platform flexible enough to support its strategy of presenting quickly changing inventory to online shoppers, says Baker, who also serves as head of e-commerce for TK Maxx in the U.K. and Ireland.
"The Venda platform suited our need to get live quickly and relatively cost-effectively, and it allows us to handle quickly turning merchandise," Baker says.
Like a number of other retailers, TJX is finding SaaS e-commerce platforms—which reside on the vendor's web-based infrastructure and share core technology with other retailers—the best option for quickly establishing an e-commerce presence with a lower initial investment when compared to licensed or in-house-developed technology.
Interest in SaaS is growing "because there is strong demand among retailers for an affordable, quick-to-deploy solution with off-the-shelf functionality," says Bill Mirabito, founder and principal analyst at B2C Partners, an e-commerce technology consulting firm.
SaaS-based technology is becoming so common that a vast majority of online retailers will use it for at least some parts of their e-commerce operations, says Gene Alvarez, vice president and retail e-commerce analyst for Gartner Inc. In the report, "SaaS Impact on E-Commerce," Alvarez notes that by 2013 90% of e-commerce sites will subscribe to at least one SaaS-based service, such as a product recommendation engine, while 40% of e-commerce deployments will use a complete SaaS platform.
Other surveys by Gartner indicated that between 23% and 39% of retailers expected to have some kind of SaaS e-commerce application this year.
Dealing with issues
But while SaaS provides the advantages of quick deployment and relatively low cost of entry, it also raises several issues. Retailers in a SaaS environment usually don't have direct control of their technology's basic software source code, for example, and so must rely on the SaaS vendor to modify functionality to the retailer's specific demands, such as adding or improving basic shopping features like site search and navigation.
Just as with licensed software, there is also the question of how well a SaaS e-commerce platform will integrate with a retailer's back-end applications, such as inventory and warehouse management systems. "Integration is the biggest challenge," says Baker, adding that TJX Europe spent most of its four-month Venda implementation making the new e-commerce platform work with the retailer's merchandising, inventory, warehouse and accounting systems.
To ensure that a SaaS platform will be a good fit, a retailer must structure a SaaS contract in ways that meets its long-term as well as immediate needs, experts say.
Although retailers can't expect full direct access to a SaaS vendor's software source code, one of the major benefits of SaaS technology is that, as a vendor upgrades its platform, the upgrades can become immediately available to all retailers sharing that platform as long as the code base is a single version. But retailers in the market for SaaS technology should clarify if and how all upgrades will be shared by asking vendors if any of their clients are on separate versions of the code, says Bernardine Wu, CEO of e-commerce technology consultants FitForCommerce. If there are different versions, retailer A might not get the benefit of upgrades to retailer B's code, she notes.
Merchandising support
TJX Europe, which also considered licensing e-commerce technology, chose Venda because its fee structure suited the retailer's financial needs and because Venda provided clear contract terms and showed that its platform could scale up to handle growing customer volume and new e-commerce functionality, Baker says.
"They demonstrated to us they had attracted major new clients like Tesco plc because of their technology," he says.
Although retailers don't have direct access to Venda's basic software source code, which, for example, determines how site navigation is structured by product category, TK Maxx is able to modify the presentation layer of site navigation, enabling it to display products in a way that supports its strategy of turning inventory rapidly, Baker says.
"We have complete control of how navigation results are presented, which is important because we want to create a sense of urgency among shoppers," he says.
Because TJX Europe acquires much of its merchandise in varying quantities, the retailer needed an e-commerce platform that could show shoppers how many units of a displayed item were still available.
"Some of our new items sell out in a day, and we built the presentation layer to show how many are left when the total gets down to a few remaining," Baker says. "And if a shopper puts the last remaining item in a shopping cart and another shopper buys it first, we'll show a message in the cart saying, 'Sorry, you missed out this time,' and present images of related items for her to consider."
Controlling data
Industry experts say that several SaaS platform vendors, including Venda, Demandware Inc. and MarketLive Inc., have improved in recent years their level of service and the tools they provide to clients for directly customizing the appearance of their web sites.
Still, retailers should clarify in their SaaS contracts their access to site data—such as information that reveals how customers are using their sites—they'll need to manage their e-commerce merchandising and marketing strategies.
"In the world of SaaS, make sure you specify with the vendor how you can get to your data and how frequently," says Jeff Muscarella, a partner at technology investment consultants NPI Financial. "A SaaS vendor may say you own your own data, but it doesn't mean they'll make it easy for you to get to it."
A retailer that demands a lot of data reports from a SaaS platform is likely to tie up more processing time than the vendor had expected under the contract; the vendor, in turn, may respond by asking the client to modify the contract terms and pay more, Muscarella says.
In case things don't work out as expected, contracts should cover termination terms—stipulating, for instance, that a client is free to terminate a SaaS contract should the vendor fail to meet predefined performance goals such as for site up-time, Muscarella adds.
SaaS à la carte
While TJX went with Venda because it wanted a feature-rich platform that it could deploy quickly and customize to its needs, other retailers take a more ˆ la carte approach to SaaS deployments.
Summit Sports Inc., for example, decided to re-architect its own in-house e-commerce platform after considering proposals in recent years from six e-commerce platform providers, two of which build licensed software to a retailer's specifications, and four SaaS. In each case, the proposal was either too costly or could not provide Summit the functionality it wanted within the retailer's desired timeline and cost range.
"We found out that we need more functionality and control over site development than the SaaS model could offer," says Andy Schepper, vice president of operations and director of e-commerce.
Summit, which sells skis, kayaks, rollerblades and other sports equipment through 11 e-commerce sites, decided that re-architecting its PHP e-commerce software infrastructure was the best way to provide new functionality key to its strategy of using a single electronic product catalog to present different merchandise displays on each of its web sites, Schepper says. PHP is a software programming language that supports dynamically generated web pages, such as those Summit displays with different merchandising offers from the same back-end catalog database.
The retailer figured the re-architecting also offered the best way to build a package configurator that, for example, would let shoppers on Skis.com customize an equipment package from among the retailer's array of skis, ski bindings, boots, poles and accessories—each available in multiple brands.
"We needed this package configurator to be completely flexible to apply to product categories like kayaks as well as skis, and it didn't seem that it would work in a SaaS environment," which didn't offer the same technology and level of service Summit could get through its in-house I.T. operations, Schepper says.
For other web site features and functions, however, Summit has integrated its in-house platform with third-party SaaS applications. It chose Adobe Systems Inc.'s Scene7 online image management application, which Adobe tweaked for Summit's image display preferences, including the ability to present alternative colors on the inside and outside of ski jackets. The application also is designed to ensure that images would load fast, Schepper says.
Freeing up I.T.
Summit also went with SaaS applications from MyBuys Inc. for a product recommendation engine, and Nextopia Software Corp. for site search and navigation. In each of these cases, Summit realized it could get the functionality it wanted more quickly than building something in-house, Schepper says.
With Nextopia, for example, shoppers on a Summit site can get better search results with misspelled words or with combinations of brand and generic terms that its former site search function couldn't recognize, resulting now in higher conversion rates among shoppers who use site search, Schepper says.
Although Summit's in-house I.T. experts also could have built a similar system, it would have taken longer and the SaaS option has freed them up to work on the package configurators and other projects the retailer prefers to build in-house, he adds.
Leaving the heavy technology work to SaaS vendors can make life easier for e-retailers in the short run; retailers must make sure their contract terms protect them in the long run.
paul@verticalwebmedia.com
