AUGUST 2001
T H E
F O R R E S T E R
The ROI Of Selling Online
R E P O R T
The Forrester Report AUGUST 2001
The ROI Of Selling Online eCommerce sites pay off for retailers that calculate ROI By Evie Black Dykema With Lisa Allen Jess Sommer
by factoring in the Web’s impact on offline sales and operational efficiencies. ROI, however, varies by the kinds of goods sold and the technology deployed.
Greg Flemming
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M A R K E T OV E RV I E W • eCommerce euphoria is giving way to ROI analysis. • Current efforts to quantify ROI don’t work.
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A N A LY S I S • Retailers must calculate companywide ROI (cROI). • A basic site is enough for replenishment items. • Convenience and researched goods need sophisticated sites.
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ACTION • Executives must customize Forrester’s cROI model. • Multibrand companies must have a unified Web strategy.
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W H AT I T M E A N S • CFOs will focus on cROI -- not ROI. • Online liquidation will make outlet centers obsolete.
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R E L AT E D M AT E R I A L • Online spreadsheet for ROI model featuring nine scenarios, three primary drivers, and 15 secondary drivers.
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GRAPEVINE
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ENDNOTES
Headquarters Forrester Research, Inc. 400 Technology Square Cambridge, MA 02139 USA +1 617/613-6000 Fax: +1 617/613-5000
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©2001, Forrester Research, Inc. All rights reserved. Forrester, Forrester eResearch, Internet AdWatch, Technographics, and TechRankings are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.
The ROI Of Selling Online MARKET OVERVIEW
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M A R K E T OV E RV I EW Online Retail ROI: Essential But Elusive With a softening economy and the cost of building a sophisticated site approaching $52 million, retailers are under pressure to quantify returns. Executives struggle to prove that eCommerce pays off because they don’t know how to measure the impact of their online efforts.
ONLINE RETAILERS SHOUT, “SHOW ME THE MONEY” eCommerce is growing up. No longer a novelty or a “special project,” selling online is a business necessity that must satisfy consumers’ love affair with the Web (see Figure 1 and see the June 15, 2001 Forrester Brief “The Digital Consumer Is Here To Stay”).1 As retail matures online, executive focus moves from page views to payback periods, from stickiness to internal rate of return (IRR) and net present value (NPV). • Skepticism about the value of eCommerce intensifies. With the demise of the dot-coms, retailers can no longer rationalize online investments as “competitive blocking” against a new breed of competitors: the Internet pure plays. For many traditional brick-and-mortar companies, dot-bombs like eToys and Furniture.com confirmed suspicions that eCommerce business models are little more than smoke and mirrors and increase demands for proof of ROI. • The economy is squeezing budgets. The faint of heart -- with little tolerance for negative same-store sales and missed earnings targets -- put eCommerce projects on the chopping block. Borders turned its site over to Amazon.com as the retailer of record, indicating that weak quarterly results are a bigger concern to the bookseller than developing an integrated multichannel operation (see the April 11, 2001 Forrester Brief “Borders Cuts And Runs -- Backwards”).2 • The Internet is part of business as usual. With more than half of US consumer households shopping online by 2003, a multichannel strategy that incorporates the Web is as important to retailers as prime real estate (see the September 2000 Forrester Report “Measuring eBusiness Success”).3
But It’s Tough To Hit A Moving Target The need to produce ROI is exacerbated by the relentless evolution of technology. Retailers whose business practices and operations for decades have remained relatively unchanged now face a nonstop stream of decisions about investing in:
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The ROI Of Selling Online MARKET OVERVIEW
Figure 1 As eCommerce Matures, The Focus Shifts To ROI Pre-1997 Pioneer days
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1997-1999
2000
2001
Great expectations
Wake-up call
Reality check
ROI • Amazon’s market • Prodigy’s online • Yahoo! Shopping cap plummets 81% marketplace -- which launches (1998) includes Spiegel, JC Penney, and • Amazon.com’s • The Nasdaq loses Sears -- has its first market cap 45% of its value in Q4 $100,000 sales day rises from $1B in (1989) 1997 to $26B (1999)
• eToys and Webvan join the list of dead dot-coms
• 1800Flowers.com debuts (1992)
• Wal-Mart and Kmart buy back their dotcoms to integrate them with the rest of their business
• Pets.com raises • The total number of more than $100M IPOs drops from 135 from VC firms (1999) in Q1 to 56 in Q4
• AOL counts Eddie Bauer, Sharper Image, and Godiva among • The eToys IPO its 14 new retailers generates $166M for the holiday season (1999) (1995)
• More than 150 dotcoms like Pets.com go bust
• Borders turns its site over to Amazon.com
• Sapient starts to shape performancebased deals pegged to ROI Source: Forrester Research, Inc.
• Web sites. Even though some retailers today can bag a bargain-basement technology buy from vendors desperate to generate cash flow, building a sophisticated site still costs more than it used to. A retailer that sells researched goods like cars or DVD players can now expect to spend up to $52 million for site development -significantly more than the $28 million necessary two years ago (see the July 2001 Forrester Report “The Cost Of Selling Online”).4 • Integration projects. As retailers meld front-end, consumer-facing eCommerce operations with back-end systems, they’re hit with heavy, hidden costs. Transitioning legacy data, working with inflexible software solutions, and employee training have cost Global 2,500 companies as much as $10 million and up for B2B integration (see the September 2000 Forrester Report “Demystifying B2B Integration”).5 • The new, new thing. As if today’s Web site and integration projects weren’t enough of a burden on retailers, tomorrow’s technologies will create additional funding demands. Pity the lackluster retailer that in 2005 won’t be able to serve the 40-some percent of US households with interactive television or Internetenabled cell phones (see the September 2000 Forrester Report “Online Retail’s Ripple Effect”).6
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The ROI Of Selling Online MARKET OVERVIEW
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The Result: Either No Numbers Or Bad Numbers With the next phase of retail peeking over the horizon, companies struggle to calculate returns on existing investments, never mind new ones. The problem? Executives don’t know: • Who’s buying what. Attempts to quantify online retail ROI are complicated by myriad redundant expenditures made by different department heads, who rarely -if ever -- discuss their technology needs with one another. Integrators tell us that overlapping product suites waste 20% of user software. • How to measure the impact on offline channels. Few retailers have integrated site, brick-and-mortar, and catalog operations -- let alone established ways to track each channel’s impact on the others. The Sharper Image is a striking exception: It compiles cross-channel purchase histories for 80% of its customers, tracks the influence of each channel on the others, and allocates costs based on relative contributions. • Which efforts drive results. Ask a retailer what kind of return he’s targeting when he authorizes a site improvement, and he probably won’t be able to say. None of the executives interviewed for a recent report on the ROI of design had specific, measurable goals for their site’s latest face-lift -- for example, moving conversion rates from 3% to 5% or delivering 20% more sales (see the June 2001 Forrester Report “Get ROI From Design”).7
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The ROI Of Selling Online ANALYSIS
A N A LY S I S
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eCommerce ROI Extends Beyond The Web Retailers that limit their eCommerce ROI analysis to sales generated online overlook two key benefits: incremental offline sales and operational efficiencies. Merchants that calculate companywide ROI (cROI) will find that online retail investments pay off -- but only with the right technology.
RETAILERS MUST FOCUS ON COMPANYWIDE RETURNS Retailers can’t figure out the ROI of online retail because they’re looking in the wrong place. Companies trying to calculate ROI based only on online sales will find that their investments never pay off because they are missing two important pieces of the puzzle: operational efficiencies and offline sales (see Figure 2). Retailers must therefore measure companywide ROI (cROI), which Forrester defines as: The incremental cash flow -- cost savings and revenues -- generated by online retail technology throughout a multichannel company.
cROI Rests On Two Key Factors To help multichannel retailers gauge the level of companywide returns they should expect, Forrester built a detailed model: It assumes after-tax returns, a three-year lifetime for hardware and software investments, average demand for products, and sales across all channels of $750 million to $1.5 billion.8 The output? Nine cROI scenarios that are based on the (see Figure 3): • Level of site functionality. We categorize sites according to three levels of technology: Basic, Mainstream, and Sophisticated. The cost model in the companion Forrester report, “The Cost Of Selling Online,” shows that the cost of each site varies depending on its core commerce, merchandising, and service capabilities.9 Implementing a merchandising system like Blue Martini helps drive up the cost of a sophisticated site 10 to 17 times more than that of a basic site with no functionality to personalize cross-sells. • Class of goods. cROI rests in part on the role that a site plays in selling a particular class of products: replenishment, researched, or convenience goods. Retailers like Best Buy need more sophisticated content and guided selling tools to help customers navigate myriad digital camera options than CVS does to remind 30-something women to replenish their stash of calcium supplements.
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The ROI Of Selling Online ANALYSIS
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Figure 2 cROI Yields A Complete Picture Of The ROI Of Selling Online
Operational efficiencies Online sales* Grow revenue with:
Eliminate waste and boost margins with: • Self-service • Hands-free order taking
• Affiliate programs
• Additional yield on liquidation
• Merchandising tools
• Inexpensive retention marketing
• Manufacturer referrals • User interface • New domestic and global markets
Offline sales Use sites to drive sales to: • Stores where consumers can touch and feel and enjoy the immediate gratification of making a purchase and taking it home • Catalog phone channels, where CSRs help convince shoppers to buy
*Includes PC- and other Web-enabled transactions Source: Forrester Research, Inc.
Online Sales Drive Most -- But Not All -- Of A Site’s cROI The results that our model generates shows that by 2003 almost all multichannel retailers will benefit from online sales, offline sales, and operational efficiencies -- but the mix of those benefits will be diverse (see Figure 4). • Incremental online sales are the biggest driver of returns. Online sales that would have been lost to competitors if the retailer didn’t have a site represent the leading factor in six of the nine cROI models we developed. No matter how sophisticated their site, retailers of convenience and replenishment goods can expect incremental online sales to contribute between 65% and 75% of cROI. • Operational efficiencies come in second. Although a primary driver of returns in only three cROI scenarios, the efficiencies that the Internet introduces throughout the sales process are noteworthy: Higher margins on liquidated inventory and self-service contribute to consistently significant returns of at least 24% of cROI for every site. Retailers of researched goods, which face the most complex sales process, benefit the most: more than 50% of cROI, depending on the level of functionality deployed.
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The ROI Of Selling Online ANALYSIS
Figure 3 cROI Varies Based On The Level Of Functionality And Class Of Goods
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The spreadsheet detailing this model is available online by clicking the “Get Data” button above this figure Basic site
Mainstream site
Sophisticated site
neutrogena.com
clinique.com
reflect.com
DuaneReade.com
CVS.com
drugstore.com
casio.com
BestBuy.com
Outpost.com
crateandbarrel.com
restorationhardware.com
potterybarn.com
bcfdirect.com
gap.com
landsend.com
faoschwartz.com
KBkids.com
SmarterKids.com
Core commerce
Static content and simple search terms
Interactive content and guided selling tools like parametric search
Personalized content throughout the shopping experience
Merchandising
One-size fits-all
Upsells and cross-sells targeted at customer segments
Promotions, upsells, and cross-sells targeted at individual customers
Service
Service reps field most inquiries via phone, emails and chat
Sample sites Replenishment (health and beauty products) Researched (electronics, home furnishings) Convenience (apparel, toys) Features
Knowledge base Contextual content and automatically responds multimedia video are to plain-English questions woven throughout site
cROI snapshot
Replenishment goods
Researched goods
Convenience goods
21% cROI
(9%) cROI
(3%) cROI
NPV: $0.8M Costs $3.2M*
NPV: ($4.8) Costs $10.5M
NPV: ($9.7M) Costs $28.8M
(51%) cROI
7% cROI
32% cROI
NPV: ($5.3M) Costs $3.5M
NPV: ($1.4M) Costs $16.3M
NPV: $30.8M Costs $52.2M
31% cROI
27% cROI
21% cROI
NPV: $1.6M Costs $3.1M
NPV: $5.9M Costs $13.3M
NPV: $11.9M Costs $40.9M
*Costs reflect Web site costs detailed in the July 2001 Forrester Report “The Cost Of Selling Online.” The model factors in upfront costs, such as back-end integration and kiosks Source: Forrester Research, Inc.
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The ROI Of Selling Online ANALYSIS
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Figure 4 Online Sales Will Be The Primary, But Not Only, Driver Of cROI Replenishment goods 24% 1%
27% 2%
75%
71%
Researched goods
24% 60%
3%
M
S
B
28%
2%
5%
66%
66%
67%
B
M
S
50% 1%
73%
18%
32%
33%
125%
32%
B
Convenience goods
9% M
36%
14% S
(42%) Drivers of cROI in 2003: Operational efficiencies Offline sales Online sales B = Basic site M = Mainstream site S = Sophisticated site (percentages may not total 100 because of rounding) Source: Forrester Research, Inc.
• Offline sales bring up the rear. eCommerce sites influence more offline sales than they close online, but often sites influence store and catalog sales that would have been closed otherwise -- so incremental offline sales usually generate less than 5% of site returns. Only retailers of researched goods like CompUSA, whose customers place a relatively high priority on online research, should expect offline sales to comprise any more than about 15% of cROI.
BASIC AND SOPHISTICATED SITES SHOW RETAILERS THE MONEY Retailers and manufacturers that try to play it safe by building a middle-of-the-road, mainstream site either under- or overinvest in their eCommerce efforts. They must calibrate their investment levels with what they sell. 1) Replenishment goods need only a basic site. With customers already predisposed to reorder, replenishers offering anything more than just the basics -product information, prices, and email reminders -- are making a mistake. CVS, with its Health Tracker personal medical record feature, has overdone it. 2) Researched goods require a sophisticated site. Because buying a car or computer is much more complicated than buying a razor, sites must be sufficiently equipped
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The ROI Of Selling Online ANALYSIS
Figure 5 Basic Sites Are Best For Replenishment Sites
cROI* NPV
Basic site
Mainstream site
Sophisticated site
21% $0.8M
(9%) ($4.8M)
(3%) ($9.7M)
Breakdown of cROI in year 3 Hands-free order taking Email retention marketing
Other 4% 10%
12%
Manufacturer 4% referrals 9% Affiliate 11% programs New domestic sales Operational efficiencies
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cROI action plan 1. Give store employees incentives to drive site traffic Cross-channel customer base
32%
18% Merchandising tools
Online sales
2. Develop merchandising systems working with vendors like Ecometry and Retek 3. Rely on email for retention marketing by working with service providers like Digital Impact and EchoMail
*Assumes three-year cash flow Source: Forrester Research, Inc.
to nudge consumers through each stage of a lengthy purchase process. Casio.com and Restoration Hardware must either upgrade their sites or write off their investments in eCommerce. 3) Convenience goods sell best on a sophisticated site. The more that retailers invest in content and merchandising tools that make shopping for clothes and CDs easy, the more consumers will spend. A basic site like faoschwarz.com will pay off -- but it would produce even better returns if it invested more in weaving content throughout the site like SmarterKids.com.
1) Sites Help Replenishers Sell More To Their Loyal Customers Just as cranking up the volume on a stereo will not produce better audio, spending more money on a more sophisticated site will not give grocers, drugstore chains, or other replenishers more returns. While mainstream and sophisticated sites yield negative cROI, a basic site will generate a 21% return (see Figure 5). For replenishers, the keys to driving cROI are: • Growing a cross-channel customer base. Cross-channel shoppers, bigger spenders than their single-channel counterparts, are key to boosting a replenisher’s online sales and, by extension, its cROI. By merely advertising the site in its store
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The ROI Of Selling Online ANALYSIS
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and on its shopping bags, replenishers like PETsMART can expect 32% of cROI to come from cultivating their loyal customers. • Boosting basket sizes with bare-bones merchandising. It doesn’t take much for consumers picking up replenishment items to toss additional items into their shopping carts to justify shipping costs. Replenishers like DuaneReade.com will find that even one-size-fits-all merchandising -- no personalized anything -- works just as well as the end caps in their stores -- and can generate 18% of cROI. • Improving retention with email marketing. Using email to lower the cost of holding on to customers is the key operational efficiency that sites selling health and beauty products must maximize. By working with email service providers like Exactis to reduce marketing costs from $18 to $2 per sale, retailers like Walgreens can generate 12% of cROI (see the January 2000 Forrester Report “The Email Marketing Dialogue”).10
2) Selling Online Lifts Margins And Store Sales Of Researched Goods In an about-face from replenishers, basic sites are the worst option for retailers that sell computers and other researched goods: Inadequate product information and a lack of self-service tools create so many questions for call centers that retailers lose money on every online sale. Mainstream functionality does push companywide returns into the black, but sophisticated sites generate a cROI that is more than four times as high (see Figure 6). Here’s why: • Incremental store sales. The Web’s role as a marketing tool is especially valuable when moving consumers hungry for product information about complex products through the purchase process. Forrester’s Technographics® data shows that consumers who research offline purchases online are three to 15 times more likely to do so with researched goods than they are with convenience or replenishment items (see the October 31, 2000 Forrester Brief “Why People Research Online To Buy Offline”).11 The result: Retailers like Circuit City can expect their sites to generate incremental store sales that contribute 35% of cROI. • Better liquidation margins. The ability of retailers to drive sell-through and liquidation rates by moving markdowns online is greatest when selling big-ticket researched goods because the $100 savings on a TV exceeds the cost of shipping it (see the July 6, 2000 Forrester Brief “Auto-Markdown: A Better Class Of Clearance Sales”).12 Retailers that shift off-price inventory and returns online will find that higher liquidation margins yield 25% of cROI. • Cheaper self-service. Enabling customers to find the answers to their questions themselves is an operational efficiency that lowers costs. Retailers like
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The ROI Of Selling Online ANALYSIS
Figure 6 Sophisticated Sites Are A Must For Researched Goods Basic site
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Mainstream site
Sophisticated site
cROI*
(51%)
7%
32%
NPV
($5.3M)
($1.4M)
$30.8M
Breakdown of cROI in year 3 Manufacturer Other referrals Merchandising tools 3% 7% User interface 3% 3% Email retention 35% 5% marketing Hands-free 7% order taking 12% 25% Self-service
cROI action plan
Store sales
2. Develop online clearance and auction areas and promote them on the home page, as do Sharper Image and J.C. Penney
Liquidation margins Operational efficiencies
Offline sales
1. Use software from 360Commerce and the services of SeeBeyond to integrate companywide systems for marketing and other functions across channels
Online sales
3. Help customers help themselves by implementing automated service solutions from vendors like RightNow and natural language software from vendors like NativeMinds *Assumes three-year cash flow Source: Forrester Research, Inc.
RitzCamera.com -- which worked with customer support outsourcer AskIt to cut service costs in half -- will find that self-service contributes 12% of cROI (see the May 2001 Forrester Report “Making Self-Service Pay Off”).13
3) The Web Extends Demand For Convenience Goods Similar to researched goods retailers, convenience goods retailers will find that the more they invest in eCommerce, the greater the return. Any site will generate solid cROI for them, but a sophisticated one will yield a much higher NPV -- and for most retailers a 21% cROI will exceed the IRRs associated with other projects available to the company (see Figure 7). The chief drivers of these returns are: • New business from new markets. The Web helps retailers of convenience goods broaden their customer base in previously untapped domestic or international markets (see the February 2001 Forrester Report “Expatriate Retail”).14 Dot-coms like Amazon.com demonstrate that sophisticated site functionality can make up for the lack of a local brick-and-mortar footprint; multichannel retailers that develop a country-specific site in markets like Germany or Japan can expect new markets to drive 18% of cROI.
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The ROI Of Selling Online ANALYSIS
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Figure 7 Sophisticated Sites Maximize cROI For Convenience Goods Basic site
Mainstream site
Sophisticated site
31% $1.6M
27% $5.9M
21% $11.9M
cROI* NPV
Breakdown of cROI in year 3 Other Store sales Self-service 4% 6% 4% Email retention marketing 10% Liquidation 10% margins 9% Affiliate 10% programs
1. Expand customer base by targeting promotions and products to new ethnic and regional customer segments
New markets 18% 16%
Merchandising tools
2. Develop a personalized recommendation engine working with vendors like Net Perceptions to target product pitches
13%
Cross-channel customer base Operational efficiencies
cROI action plan
Offline sales
User interface
Online sales
3. Hire eCommerce integrators like Digitas or IBM Global Services to redesign site and improve user experience
*Assumes three years of cash flow Source: Forrester Research, Inc.
• Effective merchandising. Paying for advanced selling tools pays off. Retailers like Lands’ End -- whose “Personal Shopper” guided selling tool generates double-digit conversion rates and bigger-than-average basket sizes -- can expect sophisticated merchandising to make a 16% contribution to cROI. • User-friendly user interfaces. The successful execution of Scenario Design -helping online customers achieve their goals -- leads to sales success. With simple fixes -- like showing shipping costs before requesting payment -- an apparel retailer can increase its conversion rate from 3% to 5% and contribute to 13% of cROI (see the June 2001 Forrester Report “Get ROI From Design”).15
TO UPGRADE OR NOT TO UPGRADE Because not every retailer has built the optimal type of site for the products it’s selling -faoschwarz.com is too basic for toys, while CVS.com is too sophisticated for toothpaste -the question becomes, “What to change?” Downgrading or dismantling a site doesn’t make sense because the costs of maintaining existing sites are relatively low.16 Upgrades, however, are a different story (see Figure 8). With the exception of replenishers, which should stick with the basics, retailers with:
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The ROI Of Selling Online ANALYSIS
Figure 8 Upgrades Are Only For Sites Selling Convenience Or Researched Goods
Replenishment goods
Researched goods
Convenience goods
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Basic-to-mainstream site upgrade
Mainstream-to-sophisticated site upgrade
(23%) cROI
0% cROI
NPV: ($5.7M) Costs $7.4M
NPV: ($5.0M) Costs $8.4M
20% cROI
41% cROI
NPV: $3.5M Costs $13.2M
NPV: $31.5M Costs $36.7M
25% cROI
18% cROI
NPV: $4.2M Costs $10.3M
NPV: $6.0M Costs $27.7M
Source: Forrester Research, Inc.
• Researched goods sites must upgrade. For retailers with basic sites, upgrades are a necessity: Only sites with complex technology will help consumers buy complex goods. An upgrade from basic to mainstream functionality will push cROI into the positive numbers; an extra $37 million -- smoke ’em if you’ve got ’em -- for a sophisticated site would do even better by yielding positive NPV and cROI twice as high. • Convenience goods sites should upgrade to milk an opportunity. Mainstream and sophisticated sites aren’t necessary when selling CDs and sweaters, but they’re really nice to have because the more advanced the tools and content, the better the returns. The cROI associated with an upgrade to mainstream or sophisticated -25% and 18%, respectively -- will look better than the IRRs of projects available to most convenience goods retailers.
Placing Smaller But Smart Bets Can Still Make A Difference If an upgrade is impossible given budget constraints, retailers should selectively target site improvements that will produce the biggest bang for the buck:
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The ROI Of Selling Online ANALYSIS
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• Revenue optimization. Retailers should squeeze every last nickel out of margins by implementing markdown optimization software (see the July 23, 2001 Forrester Brief “Retail Revenue Optimization: Timely And Rewarding”).17 Maximizing prices on clearance goods along with a strong cROI driver like a “sale” or “outlet” area featured on the home page will pack a one-two punch. • Site design. Most sites that Forrester reviews fail the basics of Site Design 101, but fixing simple problems can yield retailers sky-high returns: Skechers found that eliminating clicks to product detail pages from the home page helped grow last year’s holiday sales by more than 400%. Nailing the site design basics will also prepare retailers for future challenges that include ITV merchandising and developing X Internet executables (see the May 21, 2001 Forrester Brief “Online Retail Beyond The Web”).18
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The ROI Of Selling Online ACTION
ACTION
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To determine their specific companywide ROI (cROI), executives should customize the model found online in the “Get Data” section of Figure 3. Also:
Multichannel retailers must stop looking for ROI from sites. Online sales alone will never give retailers a meaningful return on their Web site investments; operational efficiencies and offline sales driven by the Web must also be considered to determine cROI. To maximize cROI, retailers like Ann Taylor must ensure that they’re not over- or underinvesting by aligning the products they’re selling -- replenishment, researched, or convenience goods -with basic, mainstream, or sophisticated levels of technology.
Manufacturers must mix cROI with channel cooperation. Manufacturers still focused on channel conflict and not offering anything but brochureware online must refocus on cROI. The Web will never generate huge direct-to-consumer sales for them but will drive operational efficiencies and incremental store sales. Panasonic.com must invest in SoftAd’s guided selling tool to make it easy for consumers to find the right DVD player and a local retailer that carries the item.
General merchants must develop hybrid sites. General merchants like Wal-Mart that sell replenishment, researched, and convenience items must use both basic and sophisticated technologies -- but in different product categories. Executives must allocate the lion’s share of their online technology budget to tools that push convenience and researched goods, since configurators from Calico and self-service software from eGain will drive sales of computers, not candy. Simple email campaigns and home page reminders to restock will be good enough to push Power Bars.
Multibrand companies must split one technology tab. Gap and Federated Department Stores must direct their portfolio brands to work together by sharing technology and growing cROI. Not only will a corporation reduce costs by leveraging one investment on the same Escalate platform and benefit from shared best practices, it’ll generate cross-sells between sister brands (see the June 22, 2001 Forrester Brief “eCommerce Basics Pay Off For Williams-Sonoma”).19
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The ROI Of Selling Online WHAT IT MEANS
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W H AT I T M E A N S cROI metrics will replace single-channel metrics. Executives will reject reports on the ROI of email campaigns and catalog mailings because they offer only a partial view of returns. Instead, there’ll be demand for metrics like “email campaign cROI” and “catalog drop cROI.” Vendors like Buystream will pioneer cROI analytics software that seamlessly integrates with POS and call center systems and calculates the impact that different marketing initiatives have on growing sales across all channels and lowering customer acquisition costs.
Malls will jump on the cROI bandwagon. Mall developers like Simon Property Group will adapt the fundamental principles of cROI to measure how much ShopSimon.com affects sales for the Mall Of America’s brick-and-mortar tenants. Simon will hire field research agencies like Pinkerton Service Group to ask mall walkers whether they visited ShopSimon.com and whether it prompted them to buy from a particular retailer. Then the Mall Of America manager can carry those numbers into negotiations for lease renewals with tenants like Saks Fifth Avenue and Service Merchandise.
Outlet malls will become closeout centers. Outlet mall anchors like DKNY and Dansk will grow less enchanted with the format and not renew their leases with Tanger Outlet Centers. No longer able to attract tenants offering bridge line clothing and china sets to customers vacationing in Kennebunkport, Tanger and other outlet center developers will sign closeout retailers like Big Lots and 99 Cents to fill shuttered store space.
cROI will prompt another round of privacy concerns. As Web site executives work more closely with their offline counterparts to help maximize cROI, they will begin to make data collected online available in stores. A point to consider: After buying a book on manic depression at bn.com, a consumer might be annoyed by the constant barrage of emails pushing self-help literature -- but she’ll be even more upset by the concerned looks from the sales clerk at checkout the next time she shops at Barnes & Noble. To avoid alienating their cross-channel consumers, retailers will offer a new feature: off-the-record purchases -- with no data collection, no personalized recommendations, and no special promotions.
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The ROI Of Selling Online REL ATED MATERIAL
R E L AT E D M AT E R I A L
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Online Resources The underlying spreadsheets detailing the forecast in Figure 3 are available online by clicking the “Get Data” button above the figure. Research Summary We spoke with Professor Ray Burke of Indiana University and Professor Mohan Sawhney of the Kellogg School of Management at Northwestern University. Additional Sources 360 Commerce www.360commerce.com Accrue www.accrue.com ATG www.atg.com AXS Technologies www.axstech.com BroadVision www.broadvision.com Buystream www.buystream.com Cap Gemini Ernst & Young www.us.cgey.com comScore Networks www.comscore.com Coremetrics www.coremetrics.com Digitas www.digitas.com E-Color www.ecolor.com Entigo www.entigo.com Escalate www.escalate.com
Garnet Hill www.garnethill.com Hanover Direct www.hanoverdirect.com Hudson’s Bay Company www.hbc.com IBM www.ibm.com InterWorld www.interworld.com J.C. Penney www.jcpenney.com Lands’ End www.landsend.com National Retail Federation www.nrf.com NCR www.ncr.com Net Perceptions www.netperceptions.com NetByTel www.netbytel.com Netkey www.netkey.com Peapod www.peapod.com
Personify www.personify.com Retek www.retek.com ReturnBuy www.returnbuy.com Sapient www.sapient.com Sears www.sears.com The Athlete’s Foot www.theathletesfoot.com The Real Estate Management Group www.borsuk.com The Sharper Image www.sharperimage.com Verbind www.verbind.com Vividence www.vividence.com Zurich Scudder Investments www.scudder.com
Related Research July 2001 Forrester Report “The Cost Of Selling Online” June 2001 Forrester Report “Get ROI From Design”
©2001 Forrester Research, Inc. Reproduction Prohibited
AUGUST 2001
The ROI Of Selling Online GRAPEVINE
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GRAPEVINE Sears is already sold on cROI. Sears Online VP and general manager Dennis Honan shared with us that “when we include the influence of our site on offline sales, we see that the site is profitable.” This, even before factoring in operational efficiencies. Hats off to the folks at Hoffman Estates for coming closer to measuring cROI than most of the companies we’ve interviewed. Honan adds that one in 20 of its lawn & garden customers check out the site before driving to the store, and one in 10 researches appliances.
…… This Athlete’s Foot problem can be cured. Bob Corliss, president and CEO of The Athlete’s Foot, complained to us that eCommerce has been overhyped and that visitors to theathletesfoot.com are 20 times more likely to search for store information than to buy from the site. Come again? Certainly Corliss’ store managers don’t view this as a problem. He probably wouldn’t either -- if he were to calculate cROI . . . and start turning Web traffic into store sales.
…… It’s a wonderful life. When we asked Bill Bass, eCommerce EVP at Lands’ End, what his company considers a reasonable payback period for its online investments, he replied, “We have a one-year payback period. To us, the only return-related equation that matters is revenues minus costs.” That’s great -- when you’ve got a preexisting direct marketing organization, customer service, and millions of convenience-oriented customers already conditioned to replenish basic clothing, sight unseen. For others in search of cROI, think payback periods of three or more years.
…… eCI + UI = cROI. Sapient’s retail practice VP Satish Kaul says online apparel sales lag behind other product categories because sites like ArmaniExchange.com don’t live up to the “architectural experience” provided in the physical store. We don’t buy it. Shopping at ArmaniExchange.com requires as much coordination as walking through the store on five-inch spike heels; no sooner does a shopper spot an outfit that she likes than the pieces fly away from her off the screen. Firms like Cooper Interaction Design have proven over and over that making shopping easy online increases conversion rates. Sapient should help retailers by stressing less “architecture” and more good design.
AUGUST 2001
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The ROI Of Selling Online ENDNOTES
ENDNOTES 1
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The market for Web-based transactions is poised to grow steadily over the next five years. By the end of 2004, more than 70% of online households in the US will have purchased online.
2
Borders Online’s decision to partner with Amazon transforms it into a de facto affiliate site and for now closes the door on a long-term multichannel strategy to serve consumers throughout the buying cycle, across channels.
3
Companies go through three stages of eBusiness technology adoption: 1) experimentation with innovative projects; 2) integration across the enterprise; and 3) external growth. As fledgling businesses like online retail mature, they graduate from stand-alone units with off-budget funding to integrated units with CEO-approved funding.
4
“The Cost Of Selling Online” offers detailed costs for different kinds of sites.
5
Four percent of companies surveyed estimate the cost to date of B2B integration to be more than $10 million.
6
By 2005, residents in 30% of US households will be multidevice consumers with at least two connected devices.
7
Many companies undergo site redesigns with soft goals like “update the look-and-feel” or “make the site simpler.”
8
Total sales selected for profiled multichannel retailers is based on an analysis of comScore data and the Forrester Retail Index.
9
The July 2001 Forrester Report “The Cost Of Selling Online” shows that retailers spend $3 million to $52 million on the software, services, and labor required to support online stores. Firms can contain costs by making simple design and process changes rather than buying new technology.
10 Sending email to a house list of customers costs about $5 per thousand, significantly lower than the $686 per thousand associated with direct mail. Assuming a 10% click-through rate and a 2.5% purchase rate (versus 3.9% for direct mail), email acquisition costs are one-ninth those of direct mail. 11 Forrester’s Technographics® October 2000 Retail & Media Mail Study shows that the following researched goods categories were most recently investigated by US households that had researched offline purchases over the prior three months: cars (18%), computer hardware (9%), travel (8%), consumer electronics (7%), and major appliances (4%). This totals 46%, three times the sum of convenience goods categories and 15 times that of replenishment categories. 12 Retailers should start to mark down inventory as soon as they identify slow-selling SKUs -- which can be done once the first 5% to 10% of the line is sold. Online liquidation enables retailers to push less popular inventory to a broader customer base much faster than they could by waiting several months and then rerouting inventory through outlet stores.
©2001 Forrester Research, Inc. Reproduction Prohibited
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The ROI Of Selling Online ENDNOTES
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13 Retailers like RitzCamera.com, Amazon.com, and REI reduced call volumes by 12.6% to achieve a 200% ROI. 14 Expatriate retail sales of convenience goods -- sales by US retailers to consumers outside the US -will reach $6.5 billion in 2003 and $24.7 billion by 2005. 15 “Get ROI From Design” discusses the ROI that a composite profile of a retailer selling men’s and women’s apparel to 500,000 visitors per month can achieve within 52 days. 16 “The Cost Of Selling Online” explains that the cost of maintaining an existing Web site ranges from 28% to 43% of the cost of developing it to begin with. 17 With a down economy, merchants flocked to revenue optimization vendors at the recent Retail Systems show to get help increasing margins and cutting costs in brick-and-mortar stores. 18 X Internet executables will execute code on the user’s PC and other devices to enable shoppers to access interactive content more quickly. 19 Williams-Sonoma’s Internet division generated a profit within eight months of its launch date two years ago by building all its sites on the same platform, drawing on existing marketing collateral and names in the corporate database, and spending less than 10% of the division’s budget on experimental tools.
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