Table of ContentsExecutive Summary ............................................................................................................................................. 1Business as Usual Won’t Double Online Revenue in 5 Years .............................................................................. 2New Retail Concepts Provide the Growth Engine ................................................................................................ 3Legacy Storefront vs. New Retail Concepts .......................................................................................................... 4What Consumer Need are You Satisfying? ............................................................................................................. 6Leverage Existing Assets ...................................................................................................................................... 6A Portfolio Approach Will Work Best .................................................................................................................... 7New SaaS Sites Integrated to Core ........................................................................................................................ 7Summary ............................................................................................................................................................ 8

Executive Summary Retailers are setting aggressive targets to double online revenue in less than five years; however, spending more on email, search and affiliates is not going to be enough to achieve the necessary growth rate. Retailers must look to new ecommerce concepts to meet revenue targets. Simply copying the new entrants, however, will not ensure success. Established brands and retailers must leverage their own unique assets to create compelling new sites and applications based on these concepts, which address real consumer needs and desires. A portfolio approach to managing a number of new concepts will work best. The implementation approach that business and IT professionals can agree on is usually SaaS sites integrated into the core ecommerce platform via approved APIs and web services.

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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 its goals. Nearly every major retailer (from Macy’s to Walmart) has plans to double online revenue in the next few years. Why are nearly all retailers looking online for massive growth at 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 billion from 2007 to 2009 - nearly equal to the rest of the Internet Retailer 500 combined. Goldman Sachs now predicts that Amazon will account for 25% of all ecommerce growth over the next few years.

• Ecommerce tipping point: Ecommerce is set to pass offline commerce in terms of annual growth. According to Goldman Sachs, by 2019, ecommerce will grow by $68 billion compared to only $60 billion for offline.

• Building new stores is no longer working: At 46.6 sq. ft. of retail space per capita, the U.S. is more than twice as saturated as the second highest country (U.K.). More than 10,000 store closings happened in 2008-2009.

So how do you double online revenue in 4 years? Is the average 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).

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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 on the previous page shows that 8% CAGR requires 9 years to double – nearly twice as long as most companies’ targets. To double 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 double revenue in 4 years. Traditional customer acquisition approaches of TV, print, email, affiliates and paid search are only leading to 8% growth on aggregate for the industry. So where will the 11% additional annual growth come from?

New Retail Concepts Provide the Growth EngineThe world of ecommerce has been largely unchanged for the last decade. Nearly all retailers follow the standard ecommerce storefront model, acquire customers through email, paid search and affiliates, and reward loyalty points based on purchases. Recently, changes in consumer behavior, and the maturing of social networks and smart phones have enabled highly successful businesses based on new 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 billion. Top venture capitalists recognize the opportunity and are flooding the space with capital.

“The online shopping paradigm is finally changing. Indeed, I think we’ve seen more innovation in the last

10 months than in the last 10 years. We’ve seen an explosion of interesting technologies and opportunities that seek to change online shopping.”

– Josh Kopelman, Managing Director, First Round Capital

Many of these new retail concepts are achieving much higher growth rates than 19%. Some examples:

• Rue La La – A Private Sales site grew $0 to $140 million in two years (full disclosure: Optaros client). Others in the space include: vente privee ($0-$680 million Euros in seven years) and Gilt Groupe ($0-$500 million in three years).

• Groupon – This Group Coupon site achieved a $1 billion+ valuation in only 16 months (only YouTube was faster) and $350 million gross merchandising revenue as a two year old company.

The contrast is striking when you compare one of these new concepts against even an excellent traditional ecommerce storefront retailer. The chart below shows how Crutchfield compares against Groupon over the last year. Thirty-six-year old Crutchfield has seen flat traffic while Groupon surged in 1 year to quadruple Crutchfield’s unique visitors and double its sales.

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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 step is to understand how these new retail concepts are fundamentally different from the legacy ecommerce storefront.

Legacy Storefront vs. New Retail ConceptsNew 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 the Legacy Storefront

Legacy Storefront New Retail ConceptsCustomer Acquisition

Purchase Type Intent to purchase ImpulseWhere is She Buying? Computer at home/work Anywhere, on any deviceHow She 1st Finds Site Brand, search, affiliate Word of mouth, social networksCustomer Acquisition Costs No scale economies Increase returns to scale

MerchandisingConsumer’s Role Shop Recommend, market, merchandiseType of Merchandise Standard seasonal product Unique deals, personalizedSKU: Sales Ratio Many SKUs, small volume Few SKUs, high volumeTomorrow’s Merchandise Predictable Uncertain/exciting

Customer LoyaltyBest Customer One who buys the most One who influences the mostLoyalty Program Points for purchases Points for invitee purchasesRetailer Relationship 1:1, Seller:Shopper Brand community leaderReturn Purchases Push email offers to her Train her to check every day

Combining all of these new elements creates powerful new business models – what we call New Retail Concepts. Many of these elements can also be added on to the ecommerce storefront model – but to a lesser effect. Below is a short description of the key points of business model difference.

Customer Acquisition Nearly all ecommerce retailers assume the following about online purchases:

• Intent to purchase – impulse purchases don’t happen online; shoppers start by looking for something specific.

• Computer – is where the purchase happens.• Brand, Search and Affiliates – are what drives traffic to retailers’ sites.• No scale economies – every new shopper requires a fee to an affiliate or Google.

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New Retail Concepts make a different set 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 be trained to return to the site each day to check out the latest offer.• A retailer doesn’t have to pay Google or affiliates for new revenue – shoppers will come back for free.• Impulse purchases can happen anywhere, so mobile is very important.

MerchandisingNearly all ecommerce retailers assume the following about merchandising:

• The retail calendar is broken into seasons and appropriate merchandise must be made available at the right time for each season.

• A broader assortment is generally preferable; it provides a greater opportunity that the shopper will find something they like and make a purchase.

• Shoppers like to know that they can always find certain items on the site.

New Retail Concepts make a fundamentally different set of assumptions about merchandising:

• Traditional seasonal assortments don’t drive impulse purchases; unique or personalized merchandise is what is compelling for an impulse purchase.

• The customer is more than a shopper. She also markets to friends, recommends products, and merchandises through voting and look books, which helps buyers determine what is going to sell the best.

• Few SKUs/high volume is ideal – even down to a single SKU a day.• Limited SKUs means a site experience that can be radically different (no search, no navigation, no

product detail pages, no thumbnails and registration required at the homepage).• Surprising her with new merchandise each day is a positive. It causes her to come to the site

everyday to check out what is new, and perhaps make a purchase.

Customer Loyalty Nearly all ecommerce retailers assume the following about customer loyalty:

• Customer satisfaction is based on the basic experience – checkout, shipment accuracy, returns, etc.• A loyalty program awards a shopper for her purchases, encouraging her to shop again.• The retailer strives to have a more direct relationship with each shopper.• Even loyal shoppers require emails pushed to them with offers to get them to return and purchase.

New Retail Concepts make a different set 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, but the one that influences the largest total amount of purchases including her own and her network of invited friends.

• Loyalty programs should encourage her to invite her friends and reward her when her 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.

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What Consumer Need are You Satisfying?Many retailers make the mistake of thinking that these new elements can be tacked on to traditional campaigns (e.g. Private Sales is simply a different Coupon Code) and that alone will generate the explosive results shown by New Retail Concepts.

Unfortunately, it’s not that simple. New Retail Concepts still need to satisfy a consumer need or desire to be compelling. The consumer desire should always be kept in focus as new concepts are developed.

Leverage Existing AssetsEstablished 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 AssetsCustomer Acquisition

Purchase Type Purchase historyWhere is She Buying? In-store and onlineHow She 1st Finds Site Existing trafficCustomer Acquisition Costs Existing customer list

MerchandisingConsumer’s Role Early purchasers of top trendsType of Merchandise Strong supplier relationshipsSKU: Sales Ratio Most popular itemsTomorrow’s Merchandise Buyer expertise

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Customer LoyaltyBest Customer List of top customersLoyalty Program Existing loyal customersRetailer Relationship Trusted brandReturn Purchases Email campaigns

A Portfolio Approach Will Work BestMany brands and retailers fall into the trap of trying to create the one, perfect new concept. The result is often an extended period of analysis and internal meetings that leads to nothing being implemented. The one perfect idea becomes the enemy of the good. With New Retail Concepts it is generally better 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 staffing. 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 new concept projects, yet needs to ensure security, scalability, stability and compliance with corporate standards for any new project.

An approach that most of our clients’ IT departments prefer is a separate SaaS ecommerce platform that integrates via approved APIs into the core system for product information and checkout. Additional “nice-to-have” integrations include a shared cart and single sign-on, but these are not mandatory. The table below provides a more detailed description of this common approach. This approach gives the business control over the user experience (which is critical to maintaining the brand) and doesn’t divert IT resources away from the core site. It also complies with IT’s standards and avoids burdening them with yet another system to manage.

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SummaryOnline retailers with aggressive growth goals are increasingly recognizing that they will need to look to New Retail Concepts to achieve those goals. Incremental improvements in existing storefront models simply won’t generate enough growth. To create success with these new concepts, retailers should look for opportunities to leverage a portfolio approach of SaaS-based implementations, based on a strategic understanding of new customer needs and the retailer’s unique assets.

Most companies find it quite helpful to put more structure 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 set 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 screen and fleshed out through rapid prototyping for final prioritization.

TO LEARN MORE, CONTACT US Optaros Corporate Headquarters 10 Milk St 11th Floor Boston, MA 02108 P (617) 227-1855 F (617) 224-5388 E info@optaros.comwww.optaros.com

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