Forrester State of Retailing Online 2009 Marketing

Making Leaders Successful Every Day

June 5, 2009

The State Of Retailing Online 2009: Marketingby Sucharita Mulpurufor eBusiness & Channel Strategy Professionals

www.forrester.com

© 2009, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester®, Technographics®, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please email [email protected]. For additional information, go to www.forrester.com.

For eBusiness & Channel Strategy Professionals

ExECuTivE SuMMaRyThis report reflects the 12th annual fielding of “The State of Retailing Online,” a Shop.org study conducted by Forrester Research. The objective of the study is to collect a series of benchmarks from online retailers that primarily transact in the business-to-consumer space. This is the first of a three-part series of reports based on those findings and highlights marketing priorities, spend, allocation, and areas of marketing focus. The key findings of this year’s report were that most retailers affirm that the Web channel is better positioned to weather the economic storm than the offline channel, with many retailers seeing the downturn as an opportunity to capture market share from weakened competitors. As for specific tactics, paid search continues to reign as the preferred customer acquisition tactic. However, several retailers report an increased focus on customer retention for which email is the preferred communication tool. Forrester Web site visitors without client access to our research can purchase this report at www.shop.org.

TaBlE OF COnTEnTSOnline Retail Overall Continues To Grow In Spite Of The Economy

Web Retailers With The Most Momentum Plan To Grow Web Marketing Spend

Acquisition Marketing Still Dominates As Companies Clamor For Market Share

Retention Marketing also Garners Renewed interest in The Down Economy

RECOMMEnDaTiOnS

The Downturn Presents An Opportunity To Grow

Supplemental Material

nOTES & RESOuRCESForrester examined data from “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research. Respondents include online retailers that transact with consumers by selling products via the internet.

Related Research Documents“uS eCommerce Forecast, 2008 To 2013”February 2, 2009

“The State Of Retailing Online 2008: Marketing Report”May 7, 2008

June 5, 2009

The State Of Retailing Online 2009: MarketingThis is the first document in the “The State Of Retailing Online 2009” series.

by Sucharita Mulpuruwith Patti Freeman Evans, Peter Hult, and Brendan McGowan

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© 2009, Forrester Research, inc. Reproduction ProhibitedJune 5, 2009

The State Of Retailing Online 2009: Marketing For eBusiness & Channel Strategy Professionals

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OnlInE RETAIl OvERAll COnTInuES TO GROw In SPITE OF ThE ECOnOMy

In spite of the current global economic downturn, US eCommerce continues to outpace the growth of other retail channels. Forrester’s most recent eCommerce forecast projects that Web sales will be more than $156 billion in 2009, representing approximately 6% of the total US retail pie and 11% growth over 2008 Web sales (see Figure 1). That growth is also likely to be distributed across a variety of product categories ranging from hard goods such as computer hardware and consumer electronics to soft goods such as apparel and accessories (see Figure 2).

eCommerce executives reinforce this market assessment. In “The State of Retailing Online 2009” study, we found that more than half of online retailers (54%) believe that the outlook for the retail industry as a whole is gloomy and that retail sales will continue to slow in the coming 12 months (see Figure 3).

However, 80% of online retailers said that they believe that the Web channel is better suited than other channels to withstand an economic downturn. More than half (57%) also believe that multichannel retailers, in particular, are better suited to weather the economic turbulence than single-channel retailers. Spotting something of a silver lining, many of these same online retailers also indicated that the recession presents otherwise unlikely opportunities, such as the chance to capture more customers from weak competitors. Indeed, 33% of our respondents said that the downturn has already enabled them to capture greater market share in their respective verticals. eCommerce retailers report that their conversion rates continue to range from 3% to 3.5% as they have for years, which is another indication that the Web has not been as adversely impacted as other channels (see Figure 4).

Figure 1 eCommerce Sales Continue To Climb

Source: Forrester Research, Inc. 54543

2007 2008 2009 2010 2011 2012 2013 Percentage of total

US retail sales

Online retail sales* (US$ billions)

5% 5% 6% 6% 7% 8% 8%

Source: Forrester Research Internet Shopping Model, 12/08 (US) *Retail does not include automotive, travel, and prescription drugs.

$125.1 $141.3

$156.1

$176.9 $194.4

$211.7 $229.1

Forecast

© 2009, Forrester Research, inc. Reproduction Prohibited June 5, 2009


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Figure 2 eCommerce Growth is Distributed across all Product Categories


2009 2012 2013 2011 2010 2008

Total US online sales (US$ billions)

Growth

Actual Forecast

Computer hardware, software, and peripherals

Consumer electronics

Books

Music/video

Movie tickets

Event tickets

Over-the-counter medicines and personal care

Apparel, accessories, and footwear

Jewelry

Food and beverage

Pets

Toys and video games

Sporting goods

Flowers

Furniture

Appliances and home improvement

Art and collectibles

Office products

Auto parts

Other

13%

$141.3

$23.6

$17.2

$1.7

$3.2

$5.1

$25.5

$11.1

$5.0

$2.2

$7.3

$1.6

$3.1

$1.0

$5.5

$5.2

$5.0

$1.5

$2.7

$6.7

$7.2

11%

$156.1

$27.0

$19.2

$1.8

$3.6

$5.4

$27.2

$12.5

$5.2

$2.4

$8.6

$1.8

$3.4

$1.1

$6.2

$5.5

$5.9

$1.8

$2.9

$7.2

$7.4

13%

$176.9

$30.9

$22.5

$2.2

$4.2

$5.9

$30.1

$14.6

$5.6

$2.7

$10.3

$2.3

$4.0

$1.2

$7.1

$6.0

$6.9

$2.1

$3.2

$7.6

$7.5

10%

$194.4

$34.1

$25.2

$2.5

$4.7

$6.3

$32.4

$16.3

$6.0

$2.9

$11.9

$2.7

$4.5

$1.3

$7.8

$6.5

$7.8

$2.5

$3.4

$8.0

$7.6

9%

$211.7

$37.2

$27.8

$2.9

$5.2

$6.7

$34.3

$17.8

$6.3

$3.1

$13.6

$3.2

$5.0

$1.4

$8.4

$6.9

$8.7

$2.9

$3.6

$8.9

$7.7

8%

$229.1

$40.3

$30.3

$3.2

$5.8

$7.1

$36.0

$19.2

$6.7

$3.3

$15.4

$3.7

$5.5

$1.5

$8.8

$7.4

$9.6

$3.3

$3.9

$10.4

$7.8

Source: Forrester Research Internet Shopping Model, 12/08 (US) Note: US online sales may not sum to totals because of rounding.



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Figure 3 Online Retailers Remain Optimistic about The Channel


Retail sales growth will increase during the next 12 months

Retail sales growth will slow during the next 12 months

Multichannel retailers are better able to withstand an economic slowdown

than pure online or offline retailers

The online retail channel continues to be better suited to withstand an economic slowdown

than the offline retail channel

My company has lost market share to competitors since the economic slowdown began

in the fall of 2008

My company has gained market share from competitors since the economic slowdown began

in the fall of 2008

Product returns have been higher in 2009, specifically due to economic uncertainty

The economic slowdown is significantly hurting my company’s overall bottom line

80%

57%

57%

23%

33%

6%

54%

21%

Overall retail growth outlook

Web channel outlook

Market share shifts

Impact of economy on margins

Base: 82 online retailers (multiple responses accepted)

Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research

Percentage who selected 4 or 5 on a scale of 1 (strongly disagree) to 5 (strongly agree)


Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research Base: online retailers

Average Sample size

Conversion rate

Metric

Percentage of sales driven by repeat customers

Repeat rate (percentage of customers who made a repeat purchase within 12 months)

Marketing cost per order

3.4%

28%

24%

$14.30 68

59

70

85

Figure 4 Key Marketing Metrics



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web Retailers with The Most Momentum Plan To Grow web Marketing Spend

Given the as-yet uncertain outlook for the economy, retailers have had to reexamine their planned spend for their Web business this year (see Figure 5). Those retailers with the wherewithal either to spend at the level originally planned or to spend even more than originally planned for 2009 will likely drive much of the eCommerce investment in the coming months. Specifically, these retailers will:

· Continue investing heavily in interactive marketing. Web marketing spend has historically been a significant capital outlay for eCommerce groups, and this year will be no different for those companies looking to grow their online businesses. Sixteen of 20 retailers that will invest more in their online business this year said that they would increase paid search spend to drive even more sales, and 13 of the same 20 said that they would invest more in email marketing to continue growing their businesses. This group contrasts with the 30% of Web retailers that plan to spend less than originally planned. Of note, this latter group sees paid search specifically as one of the leading places to cut marketing costs (second only to hiring cuts and/or freezes). Meanwhile, far fewer in this group plan to cut expenditures on either affiliate programs (just 28% of this group) or email marketing (4%).

· Experiment with social commerce initiatives. While questions remain about the value and return on investment (ROI) of social commerce initiatives such as blogs and social networks, companies planning to increase 2009 spend for their Web channel appear ready to embrace these initiatives and tolerate the ambiguity around ROI. Twelve of 20 retailers planning to increase their Web business spend this year said that they were going to invest more in social marketing initiatives in 2009. Interestingly, among retailers that expect to spend less on their online business this year, only one-quarter (24%) plan to reduce their social marketing spend, indicating a prevailing continued willingness to invest in and experiment at least somewhat with these emerging marketing tools.

· Execute large projects. Large efforts such as integrating a new eCommerce platform or building out in-store pickup are often the critical elements necessary to move the needle. Half of the retailers planning to spend more than originally planned this year said that large projects, including eCommerce platform overhauls, are projects that they will pursue in the coming year. By contrast, those planning to spend less indicate that they will look more to quick wins, deferring large initiatives for now. Retailers specifically described such large initiatives as developing a “single view of the customer,” “international shipping,” and “mobile commerce.”



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Figure 5 increased Marketing Spend is Correlated With eCommerce Optimists



“You indicated that your company will spend more on its online business in 2009. Which of

the following areas will be affected?”

Increase search spend

Increase email spend

Increase social marketing spend

Focus primarily on large initiatives

Accelerate major replatforming

Increase or have flat staff/hiring

Increase affiliate marketing spend

Focus on small initiatives


80%

65%

60%

50%

45%

45%

30%

30%

“You indicated that your company will spend less on its online business in 2009. Which of

the following areas will be affected?”

Decrease or have flat staffing/hiring

Decrease search spend

Focus primarily on small initiatives

Hold off on major replatforming

Decrease affiliate marketing spend

Decrease social marketing spend

Focus primarily on large initiatives

Decrease email spend

88%

56%

48%

44%

28%

24%

12%

4%


Base: 84 online retailers

“How much are you going to spend on your Web business in 2009?”

Less than originally planned 30%

More than originally planned 24%

About the same as originally planned 46%

ACquISITIOn MARkETInG STIll DOMInATES AS COMPAnIES ClAMOR FOR MARkET ShARE

The leading goal of interactive marketing spend continues to be acquiring new customers or, in the words of one retailer, “cramming more people in the metaphorical Web door.” With the economy having squeezed numerous retailers out of business, companies, especially the multichannel players that remain, are looking to grab a larger piece of the remaining pie, which they believe can be best addressed through acquisition marketing (see Figure 6-1).



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For all the talk of the importance of retention marketing, most retailers in our survey indicated that their focus on acquisition marketing is higher in 2009 than it was in 2008 (see Figure 6-2). And multichannel retailers are skewed toward acquisition, with 26 of 42 multichannel retailers increasing their focus on acquisition relative to 2008. Meanwhile, pure-play companies that are primarily online are focusing on retention, with 15 of 20 pure plays aiming to spend more in 2009 on retention than in 2008 (see Figure 6-3).

Of course, the overriding focus on acquisition is seemingly veiled commentary on paid search, which has been the most common and effective marketing acquisition tactic for online retailers for years and continues to be such (see Figure 7-1). However, the significance of paid search could be on the wane as it:

· Loses ground to natural search. Because of the technical complexities involved with natural search optimization (which often means a redesign of key site pages), far fewer retailers say that they engage in natural search optimization, compared with paid search. However, search engine optimization (SEO) has generally been regarded as an extremely successful and cost-effective (if a somewhat labor-intensive) tactic (see Figure 7-2). Consequently, as key pages or items from a site are indexed, the need to rely on paid search naturally becomes less pronounced. Retailers are beginning to recognize this benefit, and a somewhat greater percentage of retailers in our survey said that they are planning to focus on natural search optimization (78%) in 2009, compared with paid search (70%).1

· Experiences unprecedented skepticism. Paid search undoubtedly is the workhorse of the interactive marketing world, delivering more new customers for retailers than any other source — and commanding a larger share of Web retailers’ marketing budgets than any other marketing tactic (see Figure 8). However, retailer exasperation with declining returns on paid search investment appears to becoming much more widespread. Several retailers in our survey commented that paid search was getting “more competitive” and “expensive.” Others are finding that key metrics such as paid search conversion are decreasing while “effectiveness continues to decline” — the proverbial double whammy. Those retailers that are doing well with paid search are particularly strong at optimizing long-tail terms (versus broad terms).

· Remains only an arrow in the marketing quiver of the biggest-spending retailers. While paid search is generally regarded as the most successful interactive marketing acquisition tactic, it also has a point of diminishing returns. The largest retailers with the biggest marketing budgets earn significantly lower revenues per click than do midsize and smaller retailers (see Figure 9). Because of the decreasing effectiveness of search, large retailers look to other efforts such as affiliate marketing, shopping comparison engines, and online banners to engage as many new customers as possible.



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Figure 6 Focus On Customer acquisition Continues To Be Strong


Percentage of the total marketing and advertising costs that were spent by, or allocated to, the online division for each primary purpose in 2008:

Brand awareness 12%

Sales in non-online channels 17%

Online customer retention 22%

Online customer acquisition 49%

Base: 82 online retailers

Customer acquisition is a key focus for online retailers 6-1

Most online retailers will maintain or increase customer acquisition and retention costs in 2009 6-2

Higher Same Lower Spend compared with 2008:

Change in marketing spend in 2009 on:

Customer acquisition

Small

Medium

Large 14

15

13

7

7 3

7

8 6

Customer retention

Small

Medium

Large 14

12

13 9

12

13

2

4

1

Sales in other channels

Small

Medium

Large 3

2 4

13 6

9

6

15

12

Online retailers by size*

Small

Medium

Large 2

5

3 15 6

10 13

14 9 Brand awareness

Base: online retailers (sample size varies from 70 to 80 retailers)

Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research *Large online retailers had more than $100M in total online sales in 2008, medium-size online retailers had

from $10M to $100M, and small online retailers had less than $10M.




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Figure 6 Focus On Customer acquisition Continues To Be Strong (Cont.)


Multichannel retailers are skewed toward acquisition and pure plays toward retention 6-3

Manufacturer

Primarily online

Multichannel 26

12

4 3

11 7

10 6

1

Customer acquisition

Customer retention

Manufacturer

Primarily online

Multichannel 20 19 3

15 3 2

2 2 4

Sales in other channels

Manufacturer

Primarily online

Multichannel 5 20 11

3

4

16 8

1 2

Brand awareness

Manufacturer

Primarily online

Multichannel

1

5

4 16 8

21 15

2 5

Higher Same Lower Spend compared with 2008:


Base: online retailers (sample size varies from 70 to 80 retailers)

Change in marketing spend in 2009 on:

Online retailers by type



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Figure 7 Search is The Most Effective acquisition Tactic, But Email is Most Effective Overall




Traditional portal deals

New portal deals

Online banners

Email to prospecting list

Behavioral targeting

Comparison shopping engines

SEO/natural search

Pay-for-performance search placement

Email to house list

Successful tactics overall

Email is the most successful tactic overall 7-2

89%

80%

53%

16%

11%

9%

7%

5%

1%


Successful acquisition tactics

Other

Blogs

SMS/mobile shopping applications


New portal deals

Credit card/store shopper appends

Coregistrations on other sites

Email to prospecting lists

Banner ads

Sweepstakes

Social networking sites

Offline advertising

Shopping comparison engines

Catalogs

Affiliate programs

Organic traffic

Search engine marketing 83%

51%

41%

25%

22%

20%

11%

11%

9%

6%

2%

2%

2%

2%

1%

0%

0%

Search is the most effective acquisition tactic 7-1




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Figure 8 Customer acquisition Spend via Search is High For eCommerce Retailers


Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research *Large online retailers had more than $100M in total online sales in 2008, medium-size online retailers had from $10M to $100M, and small online retailers had less than $10M.

†Averages are for those retailers that spent money on the tactic.

Base: online retailers

Large (N=18)

Medium (N=24)

Small (N=20)

Total interactive marketing budget

Pay-for-performance search


Email to house list

Online banners


New portal deals


$14,460

$5,961

$2,844

$2,597

$845

$774

$322

$220 $31 $2

$93 $7

SEO $391 $81 $11

Behavioral targeting $357 $28 $4

$195 $18

$97 $96

$116 $43

$93 $10

$3,611 $202

$4,367 $368

Average spend†

(US$ thousands)


Figure 9 Search Performance varies By Size Of Retailer


Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research *Large online retailers had more than $100M in total online sales in 2008, medium-size online retailers had from $10M to $100M, and small online retailers had less than $10M.

Base: online retailers

Large (N=19)

Medium (N=24)

Small (N=17)

Average paid search terms

Average cost per click

Average revenue per click

Percentage of paid search revenue from branded terms

Percentage of paid search revenue allocated to branded terms

1,126,412

$0.51

$5.29

61%

25% 23% 28%

50% 43%

$19.87 $11.37

$0.44 $0.52

210,462 23,466




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Retention Marketing Also Garners Renewed Interest In The Down Economy

While retention marketing has historically been a distant second goal for Web retailers, the importance of driving repeat business from existing customers is now more critical than ever as retailers struggle to compete with last year’s numbers every day. Retailers, particularly those companies that are primarily online, are subsequently responding with eager efforts to slice and dice their customer databases and remarket to their current customers.2 In “The State of Retailing Online 2008” study, approximately 25% of survey respondents reported an increased focus on retention marketing.3 By contrast, that number almost doubled in “The State of Retailing Online 2009” study, with nearly half of survey respondents expressing a retention marketing focus.4 The two most significant retention projects that retailers are addressing in 2009 are:

· Segmented email programs. Email in general is regarded as the best marketing tactic because of its cost-effectiveness. Not surprisingly, as retailers focus more on retention marketing, retailers indicate that email therefore represents the most increased marketing priority for 2009 (88%), even more so than paid search (70%) and natural search (78%) (see Figure 10). Almost three-quarters (71%) of retailers collectively agree that segmenting consumers based on implicit (e.g., purchase history) or explicit (e.g., stated preferences) data is the retention initiative that holds the most promise (see Figure 11). As for specifics, retailers stated that their email retention strategies involved more “targeted promotions,” “incentives for current customers,” and “personalized recommendations in email campaigns.” One retailer even highlighted that it was working on “identifying and marketing more aggressively to the hottest buyers.”

· Behavioral targeting. A relative latecomer to the interactive marketing arsenal, behavioral targeting has nonetheless rapidly proven its worth. Such targeting generally involves serving ad banners for a particular retailer that a consumer has already visited on other sites in a given ad network. Generally, large retailers are most likely to employ behavioral targeting in a significant way, but other retailers are also starting to recognize its value as an effective marketing tactic. Eleven percent of survey respondents said that it was one of their top marketing tactics. Furthermore, while only one-third (32%) of survey respondents said that they already use behavioral targeting, more than half said that it is a priority in 2009.5



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Figure 10 Retention Efforts Will Be Bolstered in 2009 By Email




Behavioral targeting

New portal deals

Online banners


SEO/natural search†

Email to house list

Pay-for-performance search placement

Increased priority for 2009‡

95%

89%

73%

66%

52%

36%

32%

29%

23%

70%

88%

78%

39%

27%

33%

51%

30%

6%

Percentage using each marketing tactic*

Base: online retailers (sample size varies from 50 to 73 retailers for each tactic) Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research *The percentage of retailers currently using each tactic is calculated by the number of respondents spending more than $0 on each tactic in 2008, divided by the total number of respondents for each tactic (including $0).

†This represents only companies that paid a fee for SEO assistance. ‡Increased priority is based on all respondents, including retailers that may not currently use the tactic.



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Figure 11 Email Segmentation Tops The list Of Specific Retention initiatives



Promotion of partners

Store- or catalog-only promotions

In response to customer action

“We miss you” emails and/or promotions

In response to customer purchase, confirmation with cross-sell message

In response to customer purchase, confirmation of purchase only

Cross-channel promotional campaigns

Customized email content based on customer behavior or purchase data

Newsletters

In response to shipment of products

Following cart abandonment

Online-only promotions

New product availability

Invitations to participate in surveys or customer feedback

Segmented emails to groups of customers based on stated preferences or purchase data

Types of email prioritized for 2009

71%

55%

55%

53%

51%

48%

48%

46%

44%

43%

40%

35%

33%

19%

13%


R E C O M M E n D a T i O n S

ThE DOwnTuRn PRESEnTS An OPPORTunITy TO GROw

Because consumers continue to spend online, interactive marketing spend to drive Web sales remains a lucrative investment. While other retail channels struggle, eCommerce managers have a unique opportunity to drive more sales and to test different tactics that resonate with consumers. To this end, Web retailers will be wise to:

· Exploit the opportunity to gain market share. Customer acquisition is even more critical now, with the retail landscape continuing to evolve rapidly. The competition for new customers via paid search will only intensify, especially as 80% of retailers that plan to increase their spend this year versus plan will specifically focus on increased search spending. Extensive



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paid search campaigns that target long-tail terms, presence in the myriad of general and niche shopping engines (e.g., ShopStyle, Krillion), and targeted banner advertising are likely to be the battlegrounds where surviving retailers will duke it out to win new customers. But social media should not be outright dismissed in the acquisition quest. While it is still a long way from having the success of search engine marketing and even organic traffic, 11% of retailers surveyed rated social media as an effective acquisition tactic — more than the 9% of retailers that said the same of banner advertising. There is no silver bullet here, but the important message is that a focused, efficient acquisition strategy is key to capturing market share and ensuring business survival over time.

· Perfect email execution to retain the most valuable customers. Even more so now than in the more prosperous past, retailers must deftly segment their customer base to target their best customers and then test which messages are most likely to resonate with that cream-of-the-crop group. The imperative for relevant messaging is greater than ever as retailers bombard consumers daily with promotional offers to shore up topline sales. Retailers agree that email to their house list is the most effective marketing tactic overall, particularly for retention efforts. it is encouraging to see that 88% of retailers surveyed are increasing the priority for email marketing in 2009. indeed, almost three-quarters of retailers ranked

“segmented emails” specifically as one of the top three email types that they will send this year. However, it is surprising that some easier email communication opportunities may be squandered. For example, just one-third of online retailers plan to prioritize reaching out to less productive customers with “we miss you” type messages and offers. and less than one-fifth will prioritize leveraging email for store-only or catalog-only promotions. Overall, only those retailers that have in place best-in-class email strategies, tactics, analysis, and execution skills stand a chance of having their email opened in the first place (and being less likely to solicit unsubscribes), compared with less adroit competitors.

· listen intently to the customer to inform marketing messaging. Struggling retailers naturally should focus on sure bets and quick wins that will best drive near-term sales. However, those retailers with growing Web channels should harness the power of social media to listen to and engage with customers, and then translate those learnings into online and offline marketing and advertising messages. Certainly, social media investments require resources and therefore budget, despite still unclear direct ROi. However, in the near term, direct engagement with customers in online social venues significantly increases the potential for marketing messages that truly resonate, which thus have increased potential to turn into actual sales.



16

SuPPlEMEnTAl MATERIAl

Methodology

Many of the forecast figures cited above are notably different from figures previously published by Forrester in 2008 and prior. This is due to significant changes in the methodology for calculating online sales for many of the categories above. In the past, Forrester had employed a top-down estimate of online sales driven by total retail category sales and the estimated penetration of those sales through the online channel.

This year, we employed a more conservative bottom-up projection based on estimated spend of consumers in various product categories through the online channel, multiplied by the total universe of online shoppers in that category. As a result of this difference, figures published in the past should not be directly compared with figures published in this document.

Additionally, other key changes resulted in differences in the forecast above: 1) the exclusion of auction, peer-to-peer, secondary, and small home-based business sales in all of the categories above (e.g., Forrester had historically included such sales in its eCommerce forecast figures); 2) the exclusion of online auto sales from the forecast; 3) the exclusion of gift card sales online; 4) the exclusion of online baby products; and 5) the exclusion of textbooks in online book sales.

Several categories were also defined differently from previous Forrester forecasts: 1) “flowers” no longer includes cards; 2) “sporting goods” no longer includes sporting apparel and footwear (those figures are in the “apparel, accessories, and footwear” category); 3) “over-the-counter/personal care” includes nutraceuticals, medical supplies, cosmetics, and fragrances; and 4) “appliances and home improvement” includes all large and small appliances and garden supplies. Finally, Forrester took into account the current economic downturn in this forecast and incorporated an economic factor into each of the category figures above. For each category, we made assumptions about the change in average spend per customer by category. Those figures assumed a decrease of as much as 7% in the average eCommerce spend, depending on the category.

This five-year forecast has been developed through a complex forecast model created by JupiterResearch, now a Forrester Research company. This model defines key growth levers, market drivers, and market inhibitors. Current market size is derived from sales figures from the publicly available financial documents of companies, interviews with private and non-pure-play commerce players, extrapolation for smaller players based on comparative metrics where public data was available, and consumer survey data on current product purchasing and future intention. Forecast assumptions are rigorously debated and vetted by a large cross-disciplinary group of Forrester analysts.

“The State of Retailing Online” annual survey is conducted by Forrester Research and executed in conjunction with Shop.org. Respondents include online retailers that transact with consumers by selling products via the Internet. The survey is conducted in two waves. The first wave was fielded in



17

Q1 2009 and included questions pertaining to online marketing, merchandising, and multichannel retailing. The second wave will be fielded in late spring to early summer 2009 and will include questions pertaining to profitability, key Web site metrics, and organizational structures. In the first wave, we received 117 complete and partial responses across a variety of industries, such as apparel, consumer electronics, home furnishings, and general gifting products. Forty-two respondents were multichannel retailers, and 30 of the respondents said that the Web was their primary channel of interaction with customers and overall company sales. Thirty-two of the respondents were generating $100 million or more in direct sales from their Web channels.

EnDnOTES1 Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research.

2 Fifteen of 20 pure plays (i.e., firms that sell primarily online) — or 75% — responded that they would spend more on customer retention in 2009 relative to 2008. Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research.

3 In unpublished results from “The State of Retailing Online 2008,” a Shop.org study conducted by Forrester Research, 55% of retailers that responded to the survey said that a focus on customer acquisition was higher in 2008 than in 2007, and 25% said that a focus on customer retention was higher in 2008 than in 2007.

4 Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research.

5 Source: “The State of Retailing Online 2009,” a Shop.org study conducted by Forrester Research.

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