A discussion draft of the Online Sales Tax Simplification Act of 2016 is expected to be introduced in Congress soon.
While many small retailers struggle to acquire new customers, innovative startups grow by outmaneuvering their competitors in myriad ways.
There are a slew of retailers that sell custom invitations online—about a dozen ranked in the Internet Retailer Top 500 Guide and Second 500 Guide, in fact. But PaperStyle.com Inc. says it differentiates itself in two ways: It ships orders the same day they are placed, and expert stylists are available to help consumers make buying decisions via live chat—two features that many merchants in the same category don’t offer.
However, despite consistent rave reviews from customers of a “terrific buying experience,” “quality invitations,” or “the VERY BEST customer service I’ve EVER encountered,” sales on PaperStyle.com declined 1.5% in 2013 to $4.40 million from $4.47 million in 2012.
This decline was due largely to PaperStyle, No. 911 in Internet Retailer’s 2014 Second 500 Guide, having a hard time bringing in new customers in 2013, says president David Grocer. On some of its most profitable products, the retailer suffered from changes in Google Inc.’s search results following the rollout of the Panda and Penguin updates in late 2012 and 2013. The retailer had previously used repetitive wording like “invitations” or “bridal shower” in its product descriptions to appeal to search engine crawlers. As part of its Panda update, Google began penalizing sites with too much repetition, or so-called keyword spam. This change affected sales on PaperStyle.com in a big way, as the merchant relies heavily on organic traffic from search engines to bring in traffic.
“There’s a lot more noise out there, so it’s harder to break through,” Grocer says. “It’s not harder to differentiate ourselves because we have several legs up on the competition. It’s just that the ability to let everyone know the difference is getting harder. We’ve found that once consumers discover us, they’re thrilled and they come back,” he says. “The challenge is getting the word out.”
PaperStyle.com’s story will sound familiar to quite a few other small to mid-sized merchants ranked in the 2014 Second 500 Guide. Like PaperStyle.com, many of them have loyal followings of repeat customers but say increasing competition online is making it harder or more expensive to acquire new customers.
“In general customer acquisition is hard because so many people use Google or Amazon, and it’s hard to stand out,” says Sucharita Mulpuru, principal e-commerce analyst at Forrester Research Inc. “Small retailers say they spend nearly 20% of web revenue on marketing—that’s nearly twice what large retailers spend.”
The challenges small retailers faced in 2013 are evident in the numbers. Collectively, Second 500 merchants brought in $4.741 billion in online sales in 2013, up 14.1% from $4.155 billion in 2012. That growth rate is down slightly from 15.6% for Second 500 merchants in 2012, and further behind the 17.1% growth of the largest merchants in North America in 2013, those ranked in the Top 500 Guide. The Second 500 growth rate is also below the 16.9% rate of online retail sales in 2013, according to the U.S. Department of Commerce. As a result, the Second 500’s share of U.S. online retail sales slipped slightly to 1.80% in 2013 from 1.84% a year earlier.
However, that 14.1% growth for the Second 500 is still around four times the 3.7% growth in total retail in 2013, and many small e-retailers posted major growth numbers online in 2013. Newcomers to the Second 500 Guide did particularly well—the 64 merchants new to Internet Retailer Top 1000 rankings grew web sales 40.9% in 2013 to $530.1 million from $376.3 million. And startup web-only merchants also shined—of the 25 fastest-growing retailers in the Second 500 Guide, 80% sell only online and were founded in 2009 or later.
What’s the secret of the fastest-growing Second 500 merchants? There’s no one answer, but each of them is outmaneuvering competitors in some way. Many are growing by investing in their web sites, making them eye-catching and easy and convenient to shop. Others are tapping into unmet demand with a niche product, selling in a new way or aggressively marketing to attract new customers.
Take Chalkfly.com, for example, a web-only retailer of office and school supplies. When the merchant launched in mid-2012, it faced an uphill climb, because of all retail categories, office supplies was already the one in which the largest percentage of total sales had moved online.
Competition in the sector is fierce, as around 48% of the $39.5 billion in office supply sales in the United States were transacted online by merchants ranked in the Top 500 Guide. Plus, the largest three merchants in the category—Staples Inc. (No. 3), Office Depot Inc. (No. 9) and OfficeMax Inc. (No. 12)—have sold online for nearly 20 years, and their e-commerce revenue makes up around 94% of all online office supply sales in the United States, according to an analysis of U.S. Commerce Department data.
What sets Chalkfly apart is a distinctive brand message: Chalkfly donates 5% of each sale to individual teachers. A shopper can choose which teacher to donate to when checking out, or she can opt to give her 5% to any teacher in a nearby school.
This business model gets people talking about Chalkfly. The teachers registered to receive donations are naturally inclined to tell friends, colleagues and parents about Chalkfly, and encourage them to order there instead of from Staples, Amazon.com Inc. or Office Depot, which merged with OfficeMax last year.
Chalkfly also invests in Facebook ads targeting small businesses. The message appeals to owners of independent businesses, many of whom like to give back to their communities, and understand that it can generate goodwill. What’s more, since Chalkfly operates online only, it doesn’t have the overhead costs of the physical stores its much larger competitors operate. That means it can pass on some of those savings to consumers and offer competitive prices on par with its larger competitors.