Evolution

Guide to E-Commerce Technology

Online retail sales in the U.S. topped $65 billion in 2004, reflecting a gain of 26% over 2003. This tally nearly doubles with the inclusion of travel sales, and auction sales push the total even higher. Each year, the web becomes a more popular shopping resource, and along the way consumers have evolved in their use of myriad online and multi-channel resources—indeed, the consumer has effectively become a precision shopping machine.

In our work at comScore Networks Inc., we see a great many dynamics driving this trend, but certain dynamics—including some documented by new research conducted for the recent Internet Retailer 2005 Conference & Exhibition—are particularly noteworthy. Each has specific and important implications on marketing and sales strategy.

1. Online retail growth is marked by an annual step effect:

We’ve long observed that a primary driver of online retail growth is an increase in transactions per buyer, which we’ve shown to increase significantly over the past five years. This is particularly noteworthy during the holiday shopping season, when experienced online buyers meet an increased share of their overall purchase requirements (in occasions and dollars) online. At the same time, new shoppers from the remaining pool of new web users and past non-buyers decide to give online shopping a try.

Collectively, this delivers the growth that retailers naturally expect during the season. But even after the holidays have passed, the generally positive experience of online shopping reinforces itself as a year-round activity, and drives an overall lift in the industry baseline that carries through the next year. We certainly expect to see a continuation of this cycle for at least the next couple of years.

2. The impact of broadband is not to be underestimated:

Below the surface of slowing online population growth is a far more exciting trend: By January 2005, the number of web users with broadband access at home had grown more than 25% since January 2004 and tripled since January 2002. More than 50% of all Internet users now have broadband Internet connections at home. The trend simultaneously creates huge opportunities and challenges in acquiring and retaining consumers.

Overall, increased broadband penetration brings a significant shift in favor of online retail, since households with broadband connections spend 40-50% more in a given quarter than their dial-up counterparts. The improved speed of broadband allows users to view more product images, quickly navigate between sites to comparison shop, and perhaps most importantly, quickly access the largest shopping mall in the universe because it’s always on. These have all contributed to the popularity of online shopping at the workplace, where most users have the luxury of a high speed connection. Today, with the arrival of broadband connections in more homes, consumers can use the Internet to shop with the same impulse and speed they’ve had in the workplace, but with more time and freedom, and fewer worries about discretion.

For retailers, this opens new possibilities in merchandising and other communications. Retailers are more likely than ever to use or at least try features such as virtual fitting rooms, online product demos, and other rich media. At the same time, it has never been faster or easier for a consumer to drop a site, whether because of poor design or functionality, performance issues, lack of features or functions, pricing, or countless other reasons.

3. The importance of comfort and tenure in online shopping:

By the end of 2004, year over year growth in the Internet population had expectedly slowed to about 6-7%. A recent comScore study found that only 13% of web users had never made a purchase online, and only about half of those expect to make an online purchase. Relatively small numbers, to be sure. While new online buyers will continue to contribute to increased online spending, long-term growth will come primarily from those who are already buying.

In a number of studies, we’ve consistently found that the amount consumers spend online increases with experience. This is driven primarily by increased comfort with the online buying process. This was clearly manifest in the results of a recent survey we conducted. For example, seasoned buyers are more concerned about shipping and handling fees when it comes to shopping online, while newbies worry more about the privacy of their personal information and the actual arrival of their product. Said differently, newbies are concerned about what it takes to get the product in their hands; experienced buyers know they’ll get it, they’d just prefer not to pay for the privilege.

No matter what their experience, one overriding concern by online shoppers continues to be the protection of credit card information during online transactions. This concern should prompt retailers to take action to ensure a positive customer experience by reinforcing the overall security of the buying process from purchase to delivery, especially with new buyers.

Increased experience across the population in aggregate has coincided with increased breadth of buying across categories. Indeed, our recent study revealed that newbies with less than two years of experience with online shopping had bought an average of 4.4 product categories online. In contrast, the most experienced online shoppers—those with five or more years of experience—had bought 10.4 categories.

The top five product categories in sales growth from 2003 to 2004 are Jewelry & Watches, Furniture & Appliances, Flowers, Gifts & Greetings, Home & Garden, and Apparel & Accessories. In 2001, these categories seemed far less likely to be leaders since they are more likely to sell based on touch and feel, with design or size characteristics that make consumers less likely to buy them for home delivery without first seeing the product. For many shoppers, increased comfort with and confidence in retailers has overcome these obstacles.

Not only do consumers expand the number of categories they’re willing to shop online, they are also willing to shop at a greater range of sites. In a recent survey, 84% of those with five or more years of online buying experience told us they were willing to shop at an unfamiliar site compared to 61% of those with two or fewer years of experience.

4. Channel Blurring:

Retailers clearly deserve a great deal of credit for improving consumers’ comfort and confidence by providing opportunities for shoppers to easily spread the shopping experience across channels. One indication of consumer response to these efforts can be found in a comScore Media Metrix analysis that found most leading multi- channel retailers are turning in tremendous traffic gains of up to 90% from April 2004 to April 2005.

Consumers have high and diverse expectations when they interact with these retailers. In the “Evolution of the Multi-Channel Consumer” research, jointly conducted by Fry Inc., The E-tailing Group Inc., and comScore, fully 97% of online consumers told us they want a consistent retail experience across touch points. And depending on the nature of the product, the role of each channel will vary significantly. For example, only 42% of respondents would be most likely to buy a Home Electronics item online and have it shipped, while preference for online buying and shipping jumps to 71% for gift items overall. And while many consumers report an overall positive experience with in-store returns, they are still spending more time than they expect in the process, highlighting room for improvement.

Multi-channel retailers need to step back and ask themselves: “Are we delivering the consistent multi-channel experience that consumers expect?” For instance, if a customer enters a store with printed descriptions of a product he or she is pursuing, the customer should be handled differently from one who enters with no background research at all. Store associates need to recognize educated shoppers who should be respected for their hard work, not returned to the starting line. The training required for this can, of course, be a challenge. But even incremental progress is better than ignoring the issue, and some retailers have certainly managed to make inroads here.

5. Search and Comparison Shopping:

For tens of millions of consumers, search engines and comparison shopping sites are the starting point for any purchase or life decision—large or small, online or offline. Proof is in the numbers. ComScore qSearch shows online search volume to be up 40% or more compared to last year. In some categories, the importance of comparison shopping sites is particularly noteworthy. For example, more than 90% of online consumer electronics buyers in Q1 2005 visited a comparison shopping site at some point during the month—up from less than 60% three years ago.

What do these sites mean for online retail in the long term? For one thing, these sites represent a massive marketplace, connecting millions of sellers with in-market buyers. Broadly speaking, it’s difficult to argue that this phenomenon isn’t good for online retail overall. But in a world in which consumers can instantly navigate from retailer to retailer, creating lasting loyalty has become a far greater challenge than ever before. And for many consumers and categories, price is likely to carry greater weight than ever in the broad mix of purchase decision drivers.

A promising outlook

First, the good (if old) news: our research points to continued, strong growth in online spending, with no sign of slowing in the near future. With each year, consumers are turning to the web for a wider range of categories and purchase occasions. However, the trends suggest increasingly fierce competition for each dollar, through the tools available to consumers, the range of retailers that consumers will consider and the price, service and other performance thresholds that retailers will have to cross.

In this context, retailers will have to develop and execute strategy with greater creativity, precision and discipline than ever before.

A few thought-starters:

Segmentation is the name of the game. Use every meaningful and reliable set of data you’ve got to differentiate consumers as well as competitors, product categories, and other key dimensions of your business. A one-size-fits-all approach holds far less water when consumers are as empowered as they are today. Develop a hierarchy of needs for each key consumer segment to help work toward delivering the right communications and experience to each.

Monitor cross-shopping relentlessly; invest surgically. Understand what your customers are doing when they’re not on your property. You may be surprised to learn which other retailers are your true competitors (we see this all the time). Analyze the search and comparison shopping sites that reel customers onto your property and competitive sites. On comparison shopping sites in particular, make sure someone on your team is regularly checking customer reviews—even a short-lived hiccup in performance or fulfillment can create negative word of mouth that haunts you after you’ve fixed the problem.

Multi-channel retailers must work toward delivering a consistent experience. Continuously measure and benchmark customer satisfaction in a way that is comparable across all consumer touch points. Ensure each channel is talking to the other. Make sure that store and call center associates know to look for cues that a shopper has done her research online, potentially resulting in a very different level of knowledge, service expectations or readiness to buy.

Today’s multi-channel consumer has evolved into a precision shopping machine. At a high level, dealing with this reality entails delighting customers at every turn and making no assumptions about their satisfaction with and perception of your brand. In the history of the trade, retailers have never confronted such a complex environment. Yet one timeless reality is the importance of creating customer delight—and the right mix of market insight, strategy, creativity and execution goes a long way to doing so.