How to Double Revenues with New Retail Concepts An Optaros Whitepaper www.optaros.com

2. TableofContents
Executive Summary ............................................................................................................................................. 1
Business as Usual Won’t Double Online Revenue in 5 Years .............................................................................. 2
New Retail Concepts Provide the Growth Engine ................................................................................................ 3
Legacy Storefront vs. New Retail Concepts .......................................................................................................... 4
What Consumer Need are You Satisfying? ............................................................................................................. 6
Leverage ExistingAssets ......................................................................................................................................6
A Portfolio Approach Will Work Best .................................................................................................................... 7
New SaaS Sites Integrated to Core ........................................................................................................................7
Summary ............................................................................................................................................................ 8
ExecutiveSummary
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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3. BusinessasUsualWon’tDoubleOnlineRevenuein5Years
“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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4. 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 Engine
The 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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5. 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 Concepts
New Retail Concepts differ from the legacy ecommerce storefront in how they acquire customers, merchandise
product and generate loyalty. New Retail Concepts tap into much more powerful behavioral economics that can
generate rapid revenue growth. Table A below breaks down the differences in these three areas:
Table A: How New Retail Concepts Differ from the Legacy Storefront
Legacy Storefront New Retail Concepts
Customer Acquisition
Purchase Type Intent to purchase Impulse
Where is She Buying? Computer at home/work Anywhere, on any device
How She 1st Finds Site Brand, search, affiliate Word of mouth, social networks
Customer Acquisition Costs No scale economies Increase returns to scale
Merchandising
Consumer’s Role Shop Recommend, market, merchandise
Type of Merchandise Standard seasonal product Unique deals, personalized
SKU: Sales Ratio Many SKUs, small volume Few SKUs, high volume
Tomorrow’s Merchandise Predictable Uncertain/exciting
Customer Loyalty
Best Customer One who buys the most One who influences the most
Loyalty Program Points for purchases Points for invitee purchases
Retailer Relationship 1:1, Seller:Shopper Brand community leader
Return Purchases Push email offers to her Train her to check every day
Combining 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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6. 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.
Merchandising
Nearly 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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7. 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 Assets
Established brands and retailers have numerous advantages over start-ups and should leverage these in the
development of New Retail Concepts. At a high level, the main assets are generally centered on customer
knowledge, brand and multi-channel capabilities. The key to success is merging New Retail Concepts with
existing assets in ways that are compelling for the consumer.
Existing Assets
Customer Acquisition
Purchase Type Purchase history
Where is She Buying? In-store and online
How She 1st Finds Site Existing traffic
Customer Acquisition Costs Existing customer list
Merchandising
Consumer’s Role Early purchasers of top trends
Type of Merchandise Strong supplier relationships
SKU: Sales Ratio Most popular items
Tomorrow’s Merchandise Buyer expertise
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8. Customer Loyalty
Best Customer List of top customers
Loyalty Program Existing loyal customers
Retailer Relationship Trusted brand
Return Purchases Email campaigns
A Portfolio Approach Will Work Best
Many brands and retailers fall into the trap of trying to create the one, perfect 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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9. Summary
Online 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.com
www.optaros.com
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