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Despite anticipated sluggish retail growth, online retail will remain a bright spot with retail sales* (excluding travel) rising 17% this year to $204 billion, according to The State of Retailing Online 2008, the 11th annual Shop.org study conducted by Forrester Research.

Apparel ($26.6 billion), computers ($23.9 billion), and autos ($19.3 billion) will be the largest three sales categories, projects The State of Retailing Online 2008: Marketing Report, the first of a three-part series based on the study.

As the number of people new to the internet begins to wane, online retailers are struggling between strategies that retain current customers and those that attract new ones, according to the report:

  • Online retailers allocate 53% of their marketing budgets to online customer acquisition and 21% of marketing dollars to online customer retention.
  • However, retailers are finding that traditional acquisition programs such as search engine or affiliate marketing may also serve as retention tools that attract existing customers as well as new shoppers.

Retailers report that search engine marketing remains the most effective way to reach new customers, citing 35% of sales coming from that initiative:

  • Nearly all online retailers surveyed (90%) said they use pay-for-performance search placement.
  • 79% said they will make pay-for-performance an even greater priority this year.

Companies are also using offline marketing tactics to drive customers to the web, with catalogs and other direct mail pieces taking priority over methods like television and newspaper advertising, the report found.

Though free-shipping offers have convinced some consumers to begin shopping online in the past, retailers are less interested in promoting free-shipping options this year:

  • 85% of online retailers said they used some shipping-with-conditions promotions in the past, just 35% said they would focus more on these types of promotions in 2008.
  • Retailers are eager, however, to experiment with social-computing initiatives to attract customers: 65% and 55% said that social network advertisements and widgets, respectively, would be categories of increased focus this year.

However, because social-computing efforts have so far been more effective for brand-building and less proven for driving revenue or sales, the report advises retailers to continue investments in proven techniques such as email marketing and free shipping promotions.

“What’s spearheading online retail sales growth is a tale of two shoppers that visit the web for very different reasons,” said Sucharita Mulpuru, Forrester Research principal analyst and lead author of the report. “The casual shopper goes online to look for the best price, leveraging the transparency of the internet to save money.”

“However, more affluent customers appreciate the convenience of shopping online and are not necessarily looking for the best deal. Retailers would be wise to recognize there are significant opportunities within both audiences and should market to them accordingly.”

* “Retail Sales” exclude travel and include the following categories: apparel, accessories, and footwear; appliances and tools, autos and auto parts, baby products, books, computer hardware, software, and peripherals, consumer electronics, cosmetics and fragrances, flowers and cards, food, beverages, and groceries, gift cards and gift certificates, home furnishings, jewelry, movie tickets, music and videos, office supplies, over-the-counter medicines and personal care, event tickets, pet supplies, sporting goods and apparel, and toys and video games. These are not the same categories that the National Retail Federation tracks; therefore, the numbers are not comparable.

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