Study Lays Out Plans for Successful E-Commerce

By Elizabeth Gardner

A new Boston Consulting Group study confirms what sensible Internet retailers have known all along: A Web store is more like a mail-order catalog than like a storefront. Forget "location, location, location" -- the mantra of businesses built on foot traffic or easy access from the highway -- and adopt the one favored by catalogers: "recency, frequency, monetary value." Forget attempts to build high traffic through ad campaigns and portal deals and concentrate on identifying your most faithful, frequent, and free-spending customers. Then nurture them like prize Guernseys or rare orchids. It will make the difference between profitability and oblivion.

There's no need to write an epitaph for online retailing, despite the gloom of the past few months, said BCG senior vice president Michael Silverstein. The BCG study predicts revenue of more than $50 billion for Internet retailers in 2001 (up from $35 billion in 2000) and $170 billion by 2005.

However, success will not come easy. Consumers are increasingly sophisticated and picky, and likely to blame a specific retailer rather than e-commerce as a whole when things aren't going the way they ought to. While only two percent are likely to abandon Web shopping altogether after one bad experience, a resounding 41 percent will abandon the guilty retailer for good, the BCG study showed.

The study analyzed the results of three separate Internet user surveys conducted in 1999 and 2000, two by BCG and one by Harris Interactive e.commercePulse. Combined, the surveys encompassed more than 110,000 Internet users.

BCG identified three basics for successful online retailing: a simple, intuitive Web site, a secure payment process, and reliable fulfillment. Retailers such as Amazon.com, iQVC, and Half.com provided the most satisfactory experience.

Beyond the basics, BCG said that incremental but simultaneous improvements in several key metrics can mean the difference between profitability and failure for retailers. A hypothetical online clothing retailer could change its bottom line from -78 percent to +7 percent by increasing its conversion rate from 2.2 percent to 4 percent, increasing its traffic 20 percent, increasing its repeat-customer rate from 21 percent to 35 percent, increasing those customers' annual orders from two to three, and increasing the average repeat-order size from 120 percent of the initial order to 150 percent.

The overall benchmarks BCG recommended shooting for:

Customer acquisition cost: no more than $20 to $30
Visitor-to-buyer conversion: 5 percent
Proportion of revenue from repeat customers: 50 percent
Abandoned shopping carts: no more than 40 percent
Inbound customer contacts per order: 0.4
On-time fulfillment: at least 95 percent
Completely filled orders: at least 95 percent
Returns as a percent of sales: no more than 3 percent.

Further reading

"Online Shopping Clicks Despite Slowing Economy"
Internet World News, Feb. 19, 2001