September 1, 2012, 12:00 AM

The Taxman Cometh

E-retailers can prepare for sales tax collection by smoothing their checkout flow.

By Larry Kavanagh
Lead Photo

Much has been written about the inevitability of an online sales tax. A quick look at the numbers tells the story. Thirty-one states face budget deficits totaling $55 billion dollars. And while many think it's overstated, states estimate that they are losing $23.3 billion dollars in uncollected sales tax on e-commerce. As Internet Retailer reported last month, it all adds up to a taxing situation sometime in the near future.

Two questions now face online retailers: What will collecting sales tax mean for my business? And, what can I do to minimize the impact?

E-commerce-friendly trade groups have focused on the costs to collect and remit sales tax. Because of this, my guess is that when a sales tax bill passes, collection costs will be addressed. States don't want to kill the golden goose; they just want the money.

The 5% to 10% cost increase for online shoppers, due to sales tax, may pose the bigger challenge for e-retailers.

A March 2012 report commissioned by the Maine State Chamber of Commerce concluded that online sales in Maine would have been 11% to 18% lower in 2011 had a tax been in place. The conclusion is based on research by economists in 2000, 2007 and 2009. The report further predicts that retail store sales would have been higher if an online tax had been in place, generating more jobs in the state. That suggests an online sales tax would not be good news for retailers that generate sales predominately online.

While no one can really know in advance how consumers will react to an online sales tax, it's prudent to plan for the worst case scenario. It's possible that we'll see a year or two of online sales that are flat or down.

As cited in the Maine study, many economists predict that shopping at physical stores will increase, at least temporarily. That's not a problem if you have a lot of stores. However if you rely heavily on web sales, this means a decline in either the growth rate or even the absolute number of visitors who purchase on your site.

Sites will have to turn to conversion boosters to make up lost visitors and sales. Many will do what they have always done when they need bigger response rates: ramp up the offers, discounts and savings. But how much further can e-retailers push promotions? Free shipping is already a given. Paying a customer to ship an order to them is not a sustainable business model for e-retailers.

To break the promotion addiction, think about a conversion as having two components: techniques to entice shoppers to click the Add-to-Cart button and checkout completion.

Getting a shopper to click Add-to-Cart is the sexy part of the conversion. Add-to-Cart enticements include things like video, cross-sells, Facebook Likes, personalized offers and other promotions.

Checkout completion is boring. It merely attempts to move shoppers with items in their carts to complete their orders. Not that important, right? The good news is that since it's "boring," checkout completion is often ignored and represents a big opportunity for most sites to produce more transactions without sacrificing the bottom line. Here's where to start:

Check that the order completion funnel in your analytics produces accurate numbers. Your funnel should begin after a shopper adds an item to his cart. Funnels rely on unique URLs to record checkout steps. Features like a floating cart, which generally don't trigger a unique URL, can break a funnel, making it impossible for you to get a clear idea of your site's success at converting carts. Use the "track page view" function in Google Analytics to push a virtual, trackable page if your site doesn't have a unique URL for an important interim step. Next, verify that the "proceed to checkout" prompt and all other checkout steps appear in the funnel.

Finally, validate that the number of orders reported at the bottom of your funnel roughly matches the number of orders in your order management/fulfillment system. If not coded properly, some payment methods and international shipping services can cause orders to slip out of your funnel, throwing off your conversion rate. I recently surveyed about 20 sites and found only about one-third had a fully functioning order completion funnel. You can't improve your conversion rate if you're not tracking it.

Entice more shoppers who click the Proceed-to-Checkout button to actually complete their orders. Your funnel will likely show that 10% to 25% of shoppers who proceed to checkout don't complete their orders. One reason, of course, is that shoppers balk when they see the total price, including shipping—and soon tax. Ruth Jeffers, vice president of marketing at pet products e-retailer Jeffers Pet Inc., says the e-retailer expects that if it has to collect sales tax it'll see a rise in cart abandonments. "We are hard at work coming up with strategies that will help counter that," she says.

Fear and friction points play a role here, and you can do something about both.

  • Use trustmarks (like McAfee, Better Business Bureau, etc.) to calm fears.
  • Remove "scary" warnings like "We are not responsible for replacement if you enter an invalid address" or "useful" information such as "allow up to two business days for a response to questions" that have snuck onto your checkout pages over the years. They chase away buyers.
  • Show shoppers thumbnail photos of the items they are buying to assure them they're paying for the goods they want.
  • Don't make your checkout grid/process look like an IRS 1040 form. Every box forces a shopper to think "do I need to enter something here?" or, even worse, "this seems like a lot of work." Hide options that are used by few shoppers, expanding out only when needed. For example, if most shoppers ship to their billing address, test showing only the billing address with an option to click to expand the grid if they are shipping to another location.
  • Get the surly teenage store clerk out of your validation messages. Try entering a bad e-mail address or an incorrect password on your site, then ask yourself if you would say what your site just displayed to a shopper.
  • Use global log-ins, like Facebook or Google. Many shoppers are already logged in to one of these, so you can populate their e-mail addresses and maybe address information with a single click. The less a shopper has to type or remember (friction point), the better.
  • Make Submit Order the most prominent button on the final checkout page. Repeat it at the top and bottom on the right side. Red seems to always win as a color for the button.

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