E-commerce platforms for midmarket e-retailers

It’s flexibility, say mid-tier e-retailers. While many remain do-it-yourselfers, others find the options they need in commercial platforms.

Amy Dusto

After growing up on Yahoo Inc.'s Yahoo Stores e-commerce platform, e-retailer Online Stores Inc. decided two years ago that in order to grow further it needed more flexible, feature-rich software, says CEO Kevin Hickey. "What's important for us is efficiency and being able to customize things," he says.

The retailer, which operates seven specialty web stores and booked roughly $30 million in web sales in 2012, went with eBay Inc.'s Magento platform. Magento's software is open source, meaning that retailers can modify the underlying code to fit their needs, while also choosing from some 7,300 add-ons built for Magento by developers around the world.

"It seemed to have pretty much every feature we wanted and we liked being able to extend the functionality of the product ourselves by using the open-source architecture," Hickey says. "Magento also had the fastest trajectory for enhancements."

Cookie cutter is out for mid-tier online retailers—a category e-commerce consulting firm FitForCommerce defines as web retailers generating $20 million to $75 million in annual online sales. To compete with the likes of Amazon.com Inc., they need to offer web site features that will keep shoppers coming back. While more than a third of midmarket retailers still rely on their own personnel to provide that level of customization, others are turning to the growing number of software vendors offering feature-rich e-commerce platforms at increasingly affordable prices.

"Midmarket retailers desire all the functionality that the larger markets want, but they want it faster, simpler and cheaper," says Kerry Martin, FitForCommerce senior consultant. "While this is a challenge for some providers to deliver, it certainly tends to differentiate the providers that are accurately targeting and supporting the midmarket retailer."

Of the 251 e-retailers with 2012 online sales in the range of $20 million to $75 million, according to the Internet Retailer 2013 Top 500 Guide, 94 rely on in-house staff to build and maintain their e-commerce platforms, the software that typically tackles such tasks as managing product descriptions and prices, processing orders and handling payments. The remaining 157 retailers use technology from 41 providers. They include vendors that typically serve smaller e-retailers, such as Volusion Inc., and those that serve some of the largest online merchants, such as IBM Corp. and Oracle Corp., which entered the e-commerce platform space with its $1 billion acquisition of Art Technology Group Inc. in 2010.

One way some upper-market e-commerce technology vendors are opening up to smaller merchants is by hosting their platforms online and letting clients access them via a web browser, a model known as software-as-a-service. That frees retailers from having to maintain their own data centers and the software on their own. Forrester Research Inc. analyst Martin Gill in the 2013 report, "Selecting Tools that Enable Agility," points to IBM and Oracle as examples of large vendors that offer software-as-a-service versions of their e-commerce platforms to make it easier for midmarket clients to begin working with them. That's increasingly attractive to retailers that want to launch new stores quickly or require frequent technology changes, Gill says.

The on-demand model can also be attractive to large retailers that want to launch e-commerce quickly in a new market. For example, Williams-Sonoma Inc., a housewares retail chain that maintains its U.S. e-commerce platform in-house, used web-hosted software from NetSuite Inc. to launch an Australian e-commerce site last spring. Chief information officer John Strain says it took only three months to go live with NetSuite in Australia with features that would have taken the retailer three years to build on its own.

MarketLive Inc., whose midmarket e-retailer clients include A/X Armani Exchange, Title Nine and Peruvian Connection Ltd., in 2012 introduced a more affordable version of its software designed for midmarket retailers. Called "Jump Start," the service allows them to launch new e-commerce sites in 90 days or less—about two months less than the normal setup time for MarketLive's standard platform. Jump Start web sites cost around $120,000 each to build, which is roughly 25% cheaper than the full-service platform designed for larger e-retailers, says MarketLive founder and chairman Ken Burke.

The savings come because MarketLive created 80 preset configurations that offer a variety of the most essential e-commerce features, such as shopping carts and product listing capabilities. Retailers using Jump Start cannot request any customization of the preset configurations during the 90-day setup period, Burke says. MarketLive charges clients fees that start at about $10,000 a month.

Online Stores is already seeing payoffs from its move to the Magento Enterprise edition software, which it runs on its own servers. Magento Enterprise starts at $15,500 to license annually, according to the vendor. Since completing the switch to Magento in September, Hickey says Online Stores has reduced its headcount from about 130 to 80, in turn reducing overhead costs by nearly 40%. With Magento able to provide live inventory updates and automate customer service e-mails and drop-shipping, the office staff was able to downsize from 30 to 15 people. Another 15 people were cut from the web site maintenance staff, because the work managing products across its seven e-commerce sites dropped by 75% with Magento, Hickey says, though he did hire four full-time developers to work on the platform in-house. The rest of the staff cuts were in the warehouse, unrelated to the platform.

Hickey says a Magento feature called "Store Views" contributed greatly to the lower overhead. The feature allows the retailer to manage the products for its seven sites in one database, updating the prices and promotions that display on various sites at once rather than separately. He says that's essential because some of the retailer's sites, such as ConstructionGear.com, DiscountSafetyGear.com and SafetyGirl.com, share inventory although they target different customer groups.

Additionally, the retailer's conversion rates have gone up by 8% to 20%, depending on the web site, which Hickey attributes to improved checkout and marketing tools available to him through Magento. For instance, Online Stores uses an extension from e-mail provider Bronto Software Inc.

Another e-retailer moving off the Yahoo platform is PureFormulas.com, which sells health supplements and has grown significantly in recent years, generating $30.8 million in sales in 2012, up about 54% from just less than $20 million in 2011. The retailer had been having problems on a regular basis getting payments processed by Yahoo, and during Cyber Monday, the Monday after Thanksgiving, transactions were so backed up that PureFormulas.com ended up charging customers manually for more than 5,000 orders, says chief information officer William Perez. As of mid-December, the e-retailer was still dealing with backlash from customers who had placed multiple orders that day after the first attempt didn't appear to go through, he says.

In anticipation of such problems, PureFormulas months earlier had begun the process of moving the site to a new e-commerce platform from Oracle, says CEO Jose Prendes. Cyber Monday confirmed it was a good move. "Yahoo is wonderful for a certain size of business, but there's a point where businesses just can't handle it," he says. In contrast, Oracle has successful clients in both the midmarket and the top-tier of retail. "The barrier to growth is usually your technology—we've taken that risk out," Perez says. "We know that we can grow with this software."

Yahoo acknowledges that a "small percentage" of its merchants may have experienced a short delay in non-transactional activities on Cyber Monday but says they were unrelated to its storefront order processing. Moreover, it adds that its platform is "highly reliable and scalable" and serves clients of all sizes. Yahoo's e-commerce platform is used by 34 e-retailers ranked in the 2013 Second 500 Guide, making it the second-most popular vendor among North American e-retailers with less than $18 million in annual sales. It is used by 15 e-retailers in the Top 500 Guide, where it ties for sixth in popularity.

PureFormulas.com chose Oracle because it offered the most built-in personalization features, Prendes says. For instance, the new software will allow the e-retailer with a few clicks to highlight children's products for shoppers who browse mostly in that category, or to display a prominent banner enticing a customer who isn't in the rewards program to enroll.

With implementation costs factored in, experts say Oracle can cost tens of thousands to millions of dollars. Although that's significantly more expensive than Yahoo, Prendes says the investment is necessary.

While PureFormulas.com moved to a more expensive software provider, personalized gifts retailer Things Remembered moved in the opposite direction—from one of the largest vendors to one targeting midmarket clients. It switched from IBM's WebSphere e-commerce platform to Micros Systems Inc.'s Fry e-commerce platform in 2010 because it didn't have the internal resources to handle the extensive development work WebSphere required, senior vice president and general manager Tony Chivari says. "[WebSphere] is great if you need to highly customize everything or if you're very large and going to do a lot of your programming," he says, but "we needed a retail package with 90% of the features we use already built into the platform."

Micros' web site software includes site search, search engine optimization, product recommendations, personalization, social sharing and social login tools, order management, customer relationship management, merchandising and analytics, the vendor says. It also supports mobile commerce and connects web and physical stores via Micros' point-of-sale software and hardware. The platform starts at about $250,000 annually and the total cost of ownership—including implementation and maintenance fees—is about half that of IBM WebSphere's, according to Forrester. "For our size and our focus, it was a better solution," Chivari says.

For all of commercial platforms' advances, however, some mid-tier e-retailers still believe that building and managing their e-commerce platform in-house makes it easier for them to get the features they want and to make changes quickly.

For example, gift cataloger Hammacher Schlemmer & Co. Inc. built functionality to keep track of orders customers place on its web site after viewing a product in the print catalog. The retailer does that by printing a product number in the catalog that's slightly different from the online product number; when the consumer types in the catalog number, the site takes her to the corresponding product page and attributes that sale to the print catalog, says Henry Coleman, director of e-commerce.

"That isn't standard," he says. And finding an e-commerce platform that provides that feature, Coleman says, likely would mean spending too much money. Of the vendors he has considered, most had extra functionality that he could neither strip out of the contract cost nor out of the software itself, which makes it unnecessarily bulky and hard to work with, he says.

Other retailers say they can't find commercial e-commerce software with enough functionality at the right price. Rex Creekmur, director of marketing at mid-sized e-retailer Rugs Direct, says his company evaluated several vendors, including Demandware Inc., Magento and Microsoft Corp.'s Commerce Server, and none could deliver what the retailer could build in-house. "Most of the platforms we considered would do 70% to 80% of what we needed but, for the price, we would want 100%," he says.

When calculating cost, you also have to consider the extra time it takes to work with a vendor, says Jennifer Rademacher, chief information officer for wall decal merchant Fathead LLC, a midmarket retailer that handles its own platform. "We focus a lot on the opportunity cost—what things are we accomplishing in a few minutes that would take days of communication and review with an outside contractor?" she says. "The cost savings are endless."

Some mid-tier retailers are locked in by their own technology decisions. For example, when starting out in 2000, ShoppersChoice.com decided to organize product attributes in its database using "brother" relationships, such as "medium and large" or "red and blue," says Corey Tisdale, CEO of the home appliances and furniture e-retailer. Meanwhile, the rest of the industry generally built databases using "parent-child" relationships, in which attributes nest beneath each other in a hierarchy. "Just the cost of mapping out 2.5 to 3 million SKUs and redoing the relationships that took 13 years to input would be a vast undertaking—is anything worth that?" he asks.

That's a good question, and the kind that midmarket online retailers increasingly are asking themselves. The answer no doubt varies by the e-retailer's business and existing technology. But finding the right answer is crucial for mid-tier e-retailers looking to grow, says FitForCommerce's Martin. The right software decision, she says, can accelerate growth, while the wrong choice can stifle it.



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Corey Tisdale, e-commerce platforms, Fathead LLC, FitForCommerce, Forrester Research Inc., Hammacher Schlemmer, Henry Coleman, IBM WebSphere, January 2014 Magazine, Jennifer Rademacher, Jose Prendes, Ken Burke, Kerry Martin, Kevin Hickey, Magento, MarketLive, Martin Gill, micros systems inc., midmarket e-retailers, NetSuite, Online Stores Inc., Oracle, PureFormulas.com, Rex Creekmur, Rugs Direct, ShoppersChoice.com, Things Remembered, Tony Chivari, William Perez, Yahoo Inc.