NEW YORK — Internet merchants, most of whom are still desperately searching for their first net profit, can toss out the old book on the most fruitful customers to target.
This story first appeared in the August 7, 2002 issue of WWD. Subscribe Today.
A just-released study from Jupiter Research topples what had been a longstanding pillar of e-tailing’s foundation: The Internet consultant and market researcher has found consumers who shop across multiple channels of a particular retailer typically are neither the most profitable nor most loyal customers.
For several years, the conventional wisdom was that people who shop more than one channel of a given retailer — those who Jupiter defines as active multichannel consumers — were deemed the most profitable because they tended to buy more than others offline as a result of research they did online. Many of them made purchases in cyberspace, as well. And as they were shopping more than one channel of a particular retailer, they were presumed to be more loyal to those merchants.
However, the annual Jupiter Consumer Survey, conducted in March, found quite the opposite: active multichannel shoppers are the most likely to visit a wide variety of Web sites and tend to be less profitable than other customers. They’re less profitable because they are more deal-driven, more aware of prices in all channels, and more frequent users of costly features on e-tail sites, from presentation tools such as virtual dressing rooms, color-correction technologies, zoom, spin, and videos, to online customer service aids, like live sales help, wish lists and registries.
Here’s the rub: They might be less profitable, but those consumers are the most active online. The active multichannel shoppers account for 34 percent more in online spending than other cybershoppers and 32 percent more in online-influenced spending offline.
Despite such challenges, apparel was one of the categories realizing the steepest growth in number of online consumer transactions in 2001, noted Mary Brett Whitfield, a senior vice president at Retail Forward and director of its E-Retail Intelligence Program, which has just released its annual study of the Top 50 E-Retailers. “November 2001 marked the first time a greater percentage of Internet users bought apparel than books online, with 30 percent buying an apparel item,” Whitfield said. By comparison, 29 percent of online consumers bought a book on the Internet last November. Back in August 2000, 19 percent of online shoppers bought apparel on the Web; this March, 28 percent did so.
“It is surprising to find that customers who account for the lion’s share of spending behave in a way that calls into question their profitability,” acknowledged Juliana Deeks, lead analyst for Jupiter’s Consumer Survey and a marketing specialist. “That’s why we’re suggesting that each retailer take a look at their customers’ behavior, rather than relying on conventional wisdom, in order to leverage their spending on their Web sites’ design, merchandising and marketing.”
For example, 67 percent of active multichannel shoppers have used zoom technology in the past 12 months, versus 55 percent of multichannel shoppers and 45 percent of single-channel shoppers. Jupiter defines multichannel consumers as those who use the Internet both to transact purchases and to research purchases they make offline, and single-channel consumers as those who conduct product research online but limit purchasing to the offline realm.
As for their determination to find the best deals, nearly 1 in 5 active multichannel customers said they would definitely buy from a new online store in exchange for 10 percent savings; the group is also more likely to abandon an online purchase to avoid paying sales tax. Further, actives are three times as likely as single-channel shoppers to have downloaded or printed a coupon from the ’Net to use in a store, in the past year. Of course, such deals can drive top-line gains, but at the expense of profits.
Notably, price ranked as the fifth-greatest inhibitor of apparel purchases researched online and made at traditional stores for both actives and the remaining multichannel crowd, cited by 28 percent of the former group and 15 percent of the latter. Thus, actives were almost twice as likely to cite price as a deterrent, suggesting they are more aware of prices across channels and more motivated by pricing differences. As an inhibitor to buying apparel online, price was preceded by fit; shipping and handling charges; inability to touch an item to determine its quality, and inability to feel an article’s weight.
Meanwhile, when it came to measuring online customers’ loyalty, Jupiter found actives were the least loyal, or more than twice as likely to have purchased from five or more online stores during the past 12 months than multichannel consumers, with 12 percent and 5 percent, respectively, saying they’d done so.
“We are getting to the point where retailers need to better understand how Web sites are driving sales across their channels,” Deeks noted. “What happens if an e-tailer’s Web site is driving business at other retailers’ stores? What if they’re catering to active multichannel shoppers and they’re not the most profitable segment?” the analyst posed.
“Multichannel retailers have to target their most profitable customers by observing their customers’ behavior,” Deeks advised. “They need to weigh the revenue those consumers are contributing across channels and compare it with the costs of serving them.” Though Deeks believes it is critically important to conduct such an analysis, she pointed out the process is not as straightforward as it might appear, citing such hurdles as laws protecting consumers’ privacy and the anonymity of cash transactions.
Currently, there are roughly 158 million Internet users in the U.S., with about 52 percent of them, or 82 million, having used the ’Net both to buy things and to research purchases they transact offline. But only a slim 10 percent, or 16 million people, are active multichannel consumers, cross-shopping channels of a particular merchant. Considering those figures, retailers might think it best to simply devote fewer resources to the actives segment, but the cost-benefit equation isn’t quite so easy to work out. That’s because those consumers account for a disproportionate share of Internet-related volume.
While many catalogers have been trying to drive more of their business to their Web sites, which is a less expensive way to operate than publishing and mailing catalogs, Jupiter’s findings suggest it may make sense for stores to devote more of their online efforts to marketing goods to be bought offline. That’s a premise that proliferated more than a year ago, but most e-tailers have yet to buy into the notion. In the fashion sphere, few have mounted sizable marketing presences, with Ralph Lauren’s runway.polo.com a notable exception. Lauren, of course, also has an e-tail Web site, at polo.com, which itself has been heavily marketed, through a high-profile TV and print ad campaign.
Over the next five years, Jupiter anticipates Web-impacted spending — transactions either made or researched online — will grow to $582 billion in 2006 from about $256 billion in 2002. More important, the share of Web-impacted business produced by active multichannel shoppers is expected to remain flat during that period, while share driven by other multichannel shoppers is expected to expand to 64 percent, or $372 billion, by 2006 from 56 percent, or $143 billion, this year. Share generated by actives, in contrast, is estimated at 19 percent, or $108 billion, in 2006 versus 18 percent this year, or $46 billion.
An increasing share of consumers’ online dollars are being spent at the Web sites of multichannel retailers, who accounted for eight of the top 10 e-tail sites in 2001, up from five in 2000 and three in 1999, according to Retail Forward’s study. Four of the top 10 e-tailers for 2001 sell apparel and accessories: Costco Wholesale, whose annual sales of $450 million placed the Web site fifth; QVC.com, eighth, posting sales of $350 million; Spiegel Group, ninth, at $332 million, and JCPenney.com, 10th, with $324 million. Spiegel and QVC were new entries into the top 10, having placed 11th and 13th, respectively, in 2000, with sales of $227 million and $210 million.
Two pure-plays stayed in the top 10 in 2001: Amazon.com, whose volume of $3.1 billion again topped the list, and electronics and media e-tailer Buy.com, ranking seventh, with sales of $395 million. Amazon accounted for nearly 22 percent of the combined full-year sales generated by the 50 largest e-tailers and 8.7 percent of consumers’ purchases online last year. But it has yet to post a full-year net profit and doesn’t expect to do so in 2002.
Among last year’s top 50 e-retailers, 42 were multichannel players, up slightly from 40 in 2000 and up 56 percent from 27 in 1999. Interestingly, the top 10 e-commerce sites accounted for 60 percent, or $8.64 billion, of the Top 50’s combined 2001 volume of $14.4 billion, down from a 66 percent share, a year earlier. That’s because the mid-tier players are gaining ground more rapidly online than the biggest ones: HSN.com, for instance, saw its sales triple in 2001, while HSN’s overall revenue was up 8.2 percent, and ColdwaterCreek.com realized 28 percent growth versus a company-wide sales gain of only 1 percent.