Executive	
  Summary	
  
Retailers	
  are	
  s etting	
  a ggressive	
  targets	
  to	
  d ouble	
  online	
  revenue	
  i...
 


Business	
  as	
  Usual	
  Won’t	
  Double	
  Online	
  Revenue	
  in	
  5	
  Years	
  
             “J.C.	
  Penney	
...
 

We	
  excluded	
  outliers	
  (Amazon,	
  Apple	
  and	
  any	
  retailer	
  without	
  3	
  years	
  of	
  revenue	
  ...
•     Rue	
  La	
  La	
  –	
  A	
  Private	
  Sales	
  s ite	
  grew	
  0	
  to	
  $140	
  million	
  in	
  2	
  years	
  ...
 


Legacy	
  Storefront	
  vs.	
  New	
  Retail	
  Concepts	
  
New	
  Retail	
  Concepts	
  differ	
  from	
  the	
  leg...
New	
  Retail	
  Concepts	
  make	
  a	
  d ifferent	
  s et	
  of	
  assumptions	
  that	
  lead	
  to	
  increasing	
  r...
New	
  Retail	
  Concepts	
  make	
  a	
  d ifferent	
  s et	
  of	
  assumptions	
  about	
  customer	
  loyalty	
  that	...
 


Leverage	
  Existing	
  Assets	
  
Established	
  Brands	
  and	
  Retailers	
  have	
  numerous	
  advantages	
  over...
An	
  approach	
  that	
  most	
  of	
  our	
  clients’	
  IT	
  d epartments	
  prefer	
  is	
  a	
  s eparate	
  SaaS	
 ...
Optaros how to double online revenue
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Optaros how to double online revenue

  1. 1. Executive  Summary   Retailers  are  s etting  a ggressive  targets  to  d ouble  online  revenue  in  less  than  five  years  –  but  spending   more  on  email,  search,  and  affiliates  is  not  going  to  b e  enough  to  achieve  the  n ecessary  growth  rate.       Retailers  must  look  to  n ew  ecommerce  concepts  to  meet  revenue  targets.    Simply  copying  the  new   entrants,  h owever,  will  not  ensure  success.    Established  brands  and  retailers  must  leverage  their  own   unique  assets  to  create  compelling  n ew  s ites  and  applications  based  on  these  concepts  which  address   real  consumer  needs  and  desires.    A  portfolio  approach  to  managing  a  number  of  n ew  concepts  will   work  b est.    The  implementation  approach  that  the  business  and  IT  can  a gree  on  is  usually  SaaS  s ites   integrated  into  the  core  ecommerce  platform  via  approved  APIs  and  web  services.                 Table  of  Contents   Executive  Summary ............................................................................................................................................. 1   Business  as  Usual  Won’t  Double  Online  Revenue  in  5  Years ........................................................................... 3   New  Retail  Concepts  Provide  the  Growth  Engine............................................................................................. 4   Legacy  Storefront  vs.  New  Retail  Concepts....................................................................................................... 6   What  Consumer  Need  are  You  Satisfying?........................................................................................................ 8   Leverage  Existing  Assets ..................................................................................................................................... 9   A  Portfolio  Approach  Will  Work  Best................................................................................................................. 9   New  SaaS  Sites  Integrated  to  Core..................................................................................................................... 9   Summary ............................................................................................................................................................10    
  2. 2.   Business  as  Usual  Won’t  Double  Online  Revenue  in  5  Years   “J.C.  Penney  has  seen  the  future  and  it's  digital.  The  department  store  chain  is  looking  to  grow   its  online  business  by  $1  billion  within  five  years.”     Dow  Jones  Newswire,  June  22,  2010     The  focus  to  step  up  online  operations  "is  on  the  verge  of  maniacal."    The  digital  platform  is   the  single  biggest  investment  we're  making  as  a  company."     Thomas  Nealon,  EVP  &  CIO,  J.C.  Penney   J.C.  Penney  is  not  unique,  just  the  most  open  about  their  goals.    Nearly  every  major  retailer  (from   Macy’s  to  Walmart)  has  plans  to  d ouble  online  revenue  in  the  n ext  few  years.    Why  are  n early  a ll   retailers  looking  online  for  massive  growth  a t  the  same  time?   • Amazon.    In  Q4  2009,  in  a  shaky  retail  environment,  it  grew  electronics  and  general  merchandise   sales  60%.    Amazon’s  online  revenue  increased  $10  b illion  from  2007  to  2009  -­‐  n early  equal  to   the  rest  of  the  Internet  Retailer  500  combined.    Goldman  Sachs  now  predicts  that  Amazon  will   account  for  25%  of  a ll  ecommerce  growth  over  the  n ext  few  years.         • Ecommerce  tipping  point.    Ecommerce  is  no  longer  viewed  has  h igh  growth,  but  s mall  in  s ize.     According  to  Goldman,  b y  2019,  ecommerce  will  grow  by  $68  b illion  to  only  $60  billion  for   offline.         • Building  new  stores  no  longer  w orking.    At  46.6  sq.  ft.  of  retail  space  per  capita  the  US  is  more   than  twice  as  saturated  as  the  s econd  highest  country  (UK).    Over  10,000  s tore  closings   happened  in  2008-­‐2009.     So  how  do  you  double  online  revenue  in  4  years?    Is  the  a verage  growth  rate  in  ecommerce  enough  to   achieve  that?    To  answer  that  question,  we  found  the  best  data  source  we  could  of  public  and  private   ecommerce  revenue  –  the  Internet  Retailer  500  (IR500)  –  and  calculated  the  Compounded  Annual   Growth  Rate  (CAGR)  for  the  years  provided  in  the  data  (2007-­‐2009).      
  3. 3.   We  excluded  outliers  (Amazon,  Apple  and  any  retailer  without  3  years  of  revenue  data).    The  CAGR  of   the  resulting  483  retailers  is  8%.    The  chart  above  shows  that  8%  CAGR  requires  9  years  to  double  –   nearly  twice  as  long  as  most  companies’  targets.    To  d ouble  in  4  years  requires  a  19%  CAGR.   Clearly  a  retailer  has  a  large  growth  gap  to  fill  (19%-­‐8%=11%CAGR)  if  it  wishes  to  d ouble  revenue  in  4   years.    Traditional  customer  acquisition  approaches  of  TV,  print,  email,  affiliates  and  paid  s earch  are  only   leading  to  8%  growth  on  aggregate  for  the  industry.    S o  where  will  the  11%  additional  annual  growth   come  from?   New  Retail  Concepts  Provide  the  Growth  Engine   The  world  of  ecommerce  has  b een  largely  unchanged  for  the  last  d ecade.    Nearly  a ll  retailers  follow  the   standard  ecommerce  storefront  model,  acquire  customers  through  email,  paid  s earch  and  affiliates  and   reward  loyalty  points  based  on  purchases.    Recently,  changes  in  consumer  b ehavior  and  the  maturing  of   social  n etworks  and  smart  phones  have  enabled  highly  successful  businesses  based  on  n ew  retail   concepts  such  as  Gilt  Groupe,  Groupon,  Rue  La  La,  NET-­‐A-­‐PORTER,  and  Lockerz.    Many  of  these  are   already  approaching  $500  million  in  revenue  and  are  valued  at  well  over  $1  b illion.    Top  venture   capitalists  recognize  the  opportunity  and  are  flooding  the  space  with  capital.         “The  online  s hopping  paradigm  is  finally  changing.  Indeed,  I  think  we’ve  s een  more  innovation  in  the  last   10  m onths  than  in  the  last  10  years.  We’ve  s een  an  explosion  of  interesting  technologies  and   opportunities  that  s eek  to  change  online  s hopping.”   Josh  Kopelman,  Managing  Director,  First  Round  Capital     Many  of  these  n ew  retail  concepts  are  a chieving  much  higher  growth  rates  than  19%.    Some  examples:  
  4. 4. • Rue  La  La  –  A  Private  Sales  s ite  grew  0  to  $140  million  in  2  years  (full  d isclosure:  Optaros  client).     Others  in  the  space  include:  vente  privee  (0-­‐680  million  Euros  in  s even  years)  and  Gilt  Groupe   ($0-­‐$500  million  in  3  years)       • Groupon  –  Group  Coupon  site  achieved  a  $1  billion+  valuation  in  only  16  months  (only  YouTube   was  faster)  and  $350  million  gross  merchandising  revenue  as  a  2  year  old  company.   The  contrast  is  striking  when  you  compare  one  of  these  n ew  concepts  against  even  an  excellent   traditional  ecommerce  storefront  retailer.    The  chart  b elow  shows  how  Crutchfield  compares  against   Groupon  over  the  last  year.    36-­‐year  old  Crutchfield  has  seen  flat  traffic  while  Groupon  surged  in  1  year   to  quadruple  Crutchfield’s  unique  visitors  and  double  its  sales.     So  new  retail  concepts  can  generate  much  faster  growth  rates.    But  how  can  established  brands  and   retailers  leverage  these  concepts  to  speed  their  own  growth  rates?    The  first  s tep  is  to  understand  h ow   these  n ew  retail  concepts  are  fundamentally  different  from  the  legacy  ecommerce  storefront.      
  5. 5.   Legacy  Storefront  vs.  New  Retail  Concepts   New  Retail  Concepts  differ  from  the  legacy  ecommerce  storefront  in  how  they  acquire  customers,   merchandise  product  and  generate  loyalty.    New  Retail  Concepts  tap  into  much  more  powerful   behavioral  economics  that  can  generate  rapid  revenue  growth.    Table  A  below  breaks  down  the   differences  in  these  three  areas:   Table  A:  How  New  Retail  Concepts  Differ  from  t he  Legacy  Storefront     Legacy  Storefront   New  Retail  Concepts   Customer  Acquisition       Purchase  Type   Intent  to  purchase   Impulse   Where  is  She  Buying?   Computer  at  home/work   Anywhere,  on  any  d evice   How  She  1st  Finds  Site   Brand,  S earch,  Affiliate   Word  of  mouth,  social  n etworks   Customer  Acquisition  Costs   No  scale  economies   Increase  Returns  to  S cale         Merchandising       Consumer’s  Role   Shop   Recommend,  Market,  Merchandise   Type  of  Merchandise   Standard  s easonal  product   Unique  d eals,  p ersonalized   SKU:  Sales  Ratio   Many  S KUs,  s mall  volume   Few  SKUs,  h igh  volume   Tomorrow’s  Merchandise   Predictable   Uncertain/exciting         Customer  Loyalty       Best  Customer   One  who  buys  the  most   One  who  influences  the  most   Loyalty  Program   Points  for  purchases   Points  for  invitee  purchases   Retailer  Relationship     1:1,  Seller:Shopper   Brand  Community  Leader   Return  Purchases   Push  email  offers  to  Her   Train  Her  to  check  every  day     Combining  a ll  of  these  new  elements  creates  p owerful  new  b usiness  models  –  what  we  call  New  Retail   Concepts.    Many  of  these  elements  can  also  be  added  on  to  the  ecommerce  storefront  model  –  but  to   lesser  effect.    Below  is  a  short  d escription  of  the  key  p oints  of  business  model  d ifference.   Customer  Acquisition       Nearly  all  ecommerce  retailers  assume  the  following  a bout  online  purchases:     • Intent  to  purchase  –  impulse  purchases  don’t  happen  online;  shoppers  start  b y  looking  for   something  specific         • Computer  –  is  where  the  purchase  happens   • Brand,  S earch  and  Affiliates  –  are  what  drives  traffic  to  retailers’  sites   • No  scale  economies  –  every  n ew  shopper  requires  a  fee  to  an  affiliate  or  Google  
  6. 6. New  Retail  Concepts  make  a  d ifferent  s et  of  assumptions  that  lead  to  increasing  returns  to  scaling   customer  acquisition  efforts  –  a  powerful  business  model  advantage.   • Impulse  purchases  –  consumers  will  make  impulse  purchases  online,  especially  when  a  friend   lets  them  know  about  a  unique  item/price  for  a  limited  time  and  supply  or  something  they  could   do  together   • Consumers  can  b e  trained  to  return  to  the  s ite  each  day  to  check  out  the  latest  offer   • A  retailer  doesn’t  have  to  pay  Google  or  affiliates  for  n ew  revenue  –  shoppers  will  come  back  for   free   • Impulse  purchases  can  happen  anywhere,  so  mobile  is  very  important   Merchandising   Nearly  all  ecommerce  retailers  assume  the  following  a bout  merchandising:     • The  retail  calendar  is  broken  into  seasons  and  appropriate  merchandise  must  b e  made  a vailable   at  the  right  time  for  each  s eason   • A  broader  assortment  is  generally  preferable,  it  provides  a  greater  opportunity  that  the  shopper   will  find  something  they  like  a nd  make  a  purchase   • Shoppers  like  to  know  that  they  can  always  find  certain  items  on  the  s ite     New  Retail  Concepts  make  a  fundamentally  d ifferent  s et  of  assumptions  about  merchandising:   • Traditional  s easonal  assortments  don’t  drive  impulse  p urchases,  unique  or  p ersonalized   merchandise    is  what  is  compelling  for  an  impulse  purchase   • The  customer  is  more  than  a  shopper,  she  a lso  markets  to  friends,  recommends  products,   merchandises  through  voting  and  look  b ooks  which  h elps  Buyers  d etermine  what  is  going  to  s ell   the  best   • Few  SKUs/high  volume  is  ideal  –  even  down  to  a  s ingle  SKU  a  day   • Limited  SKUs  means  a  s ite  experience  that  can  b e  radically  d ifferent  (no  search,  n o  navigation,   no  product  d etail  pages,  no  thumbnails  and  registration  required  at  the  h omepage)   • Surprising  h er  with  n ew  merchandise  each  day  is  a  positive  –  it  causes  h er  to  come  to  the  site   everyday  to  check  out  what  is  n ew,  and  p erhaps  make  a  purchase   Customer  Loyalty       Nearly  all  ecommerce  retailers  assume  the  following  a bout  customer  loyalty:     • Customer  satisfaction  is  based  on  the  basic  experience  –  checkout,  shipment  a ccuracy,  returns,   etc.   • A  loyalty  program  a wards  a  shopper  for  h er  p urchases  –  encouraging  h er  to  shop  a gain   • The  retailer  strives  to  have  a  more  d irect  relationship  with  each  shopper   • Even  loyal  shoppers  require  emails  pushed  to  them  with  offers  to  get  them  to  return  and   purchase  
  7. 7. New  Retail  Concepts  make  a  d ifferent  s et  of  assumptions  about  customer  loyalty  that  leads  to  greater   word  of  mouth,  brand  affinity  and  revenue:   • The  best  customer  is  not  the  one  that  buys  the  most,  b ut  the  one  that  influences  the  largest   total  amount  of  purchases  including  her  own  and  her  n etwork  of  invited  friends   • Loyalty  programs  should  encourage  h er  to  invite  her  friends  and  reward  h er  when  h er  friends   purchase   • It  is  the  retailer’s  job  to  cultivate  the  community  of  customers  to  increase  brand  affinity  and   encourage  the  continued  viral  growth  of  customers   What  Consumer  Need  are  You  Satisfying?   Many  retailers  make  the  mistake  of  thinking  that  these  new  elements  can  b e  tacked  on  to  traditional   campaigns  ( e.g.  Private  Sales  is  simply  a  d ifferent  Coupon  Code)  and  that  alone  will  generate  the   explosive  results  shown  b y  New  Retail  Concepts.       Unfortunately,  it’s  not  that  simple.    New  Retail  Concepts  still  n eed  to  satisfy  a  consumer  n eed  or  d esire   to  b e  compelling.    The  consumer  desire  should  a lways  be  kept  in  focus  as  n ew  concepts  are  d eveloped.              
  8. 8.   Leverage  Existing  Assets   Established  Brands  and  Retailers  have  numerous  advantages  over  start-­‐ups  and  should  leverage  these  in   the  development  of  new  retail  concepts.    At  a  high  level  the  main  assets  are  generally  centered  on   customer  knowledge,  brand  and  multi-­‐channel  capabilities.    The  key  to  success  is  merging  New  Retail   Concepts  with  existing  assets  in  ways  that  are  compelling  for  the  consumer.         Existing  Assets   Customer  Acquisition     Purchase  Type   Purchase  h istory   Where  is  She  Buying?   In-­‐store  and  online   How  She  1st  Finds  Site   Existing  traffic   Customer  Acquisition  Costs   Existing  customer  list       Merchandising     Consumer’s  Role   Early  purchasers  of  top  trends   Type  of  Merchandise   Strong  supplier  relationships   SKU:  Sales  Ratio   Most  popular  items   Tomorrow’s  Merchandise   Buyer  expertise       Customer  Loyalty     Best  Customer   List  of  top  customers   Loyalty  Program   Existing  loyal  customers   Retailer  Relationship     Trusted  Brand   Return  Purchases   Email  Campaigns     A  Portfolio  Approach  Will  Work  Best   Many  Brands  and  Retailers  fall  into  the  trap  of  trying  to  create  the  one,  perfect  n ew  concept.    The  result   is  often  an  extended  p eriod  of  analysis  and  internal  meetings  that  leads  to  nothing  b eing  implemented.     The  one  p erfect  idea  b ecomes  the  enemy  of  the  good.    With  New  Retail  Concepts  it  is  generally  b etter  to   take  more  of  a  portfolio  approach  and  test  out  a  few  concepts  in  parallel.    Rolling  them  out  quickly  and   rapidly  learning  from  customer  feedback  is  generally  a  better  approach.         New  SaaS  Sites  Integrated  to  Core       Brands  and  Retailers  are  constrained  by  their  existing  platform  and  IT  priorities  and  s taffing.  Often  these   IT  constraints  lead  to  implementations  that  are  not  what  the  business  preferred  (e.g.  Private  Sales  as  a   coupon  code).    IT  generally  does  not  have  the  time  to  take  on  these  n ew  concept  projects,  yet  n eeds  to   ensure  s ecurity,  scalability,  stability  and  compliance  with  corporate  standards  for  any  n ew  project.      
  9. 9. An  approach  that  most  of  our  clients’  IT  d epartments  prefer  is  a  s eparate  SaaS  ecommerce  platform  that   integrates  via  approved  APIs  into  the  core  s ystem  for  p roduct  information  and  checkout.    Additional   “nice-­‐to-­‐have”  integrations  include  a  shared  cart  and  s ingle  sign-­‐on,  but  these  are  n ot  mandatory.      The   table  b elow  provides  a  more  detailed  d escription  of  this  common  approach.     This  approach  gives  the  business  control  over  the  user  experience  (which  is  critical  to  maintaining  the   Brand)  and  doesn’t  d ivert  IT  resources  a way  from  the  core  s ite;      it  a lso  complies  with  IT’s  s tandards  and   avoids  burdening  them  with  yet  another  system  to  manage.   Summary   Online  retailers  with  aggressive  growth  goals  are  increasingly  recognizing  that  they  will  n eed  to  look  to   New  Retail  Concepts  to  a chieve  those  goals.  Incremental  improvements  in  existing  storefront  models   simply  won’t  generate  enough  growth.    To  create  success  with  these  n ew  concepts,  retailers  should  look   for  opportunities  to  leverage  a  portfolio  approach  of  S aaS  based  implementations,  based  on  a  strategic   understanding  of  n ew  customer  n eeds  and  their  unique  assets.     Most  companies  find  it  quite  h elpful  to  put  more  s tructure  around  the  effort  to  conceive  and  launch   new  retail  concepts.    We  recommend  a  workshop  that  walks  through  the  steps  outlined  in  this  paper  to   develop  a  s et  of  candidate  retail  concepts  that  are  true  to  the  brand  and  leverage  the  company’s   existing  assets.    These  candidates  are  then  put  through  an  opportunity  assessment  s creen  and  fleshed   out  through  rapid  prototyping  for  final  prioritization.            

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