Online Retail Sales to Reach $204 Billion

Retail sales are expected to rise 17 percent this year to $204 billion, according to an annual survey of online retailers.

Apparel ($26.6 billion), computers ($23.9 billion), and autos ($19.3 billion) will be the largest three sales categories, according to The State of Retailing Online 2008, the 11th annual Shop.org study conducted by Forrester Research, Inc. of 125 retailers.

The study, the first of a three-part series of reports based on the study, was released Thursday at Shop.org’s Online Marketing Workshop in Scottsdale, Ariz.

“From higher shipping costs to changes in consumer shopping habits, online retailers are not immune to the current economic climate,” said Scott Silverman, executive director of Shop.org, an organization of digital retailers. “But the fact that online sales will increase substantially this year demonstrates the resilience of the channel and is a testament to the value and convenience most customers find when shopping online.”

As the number of people new to the Internet begins to wane, online retailers are struggling between investing in strategies that retain current customers or those that attract new ones, according to the survey.

Online retailers allocate 53 percent of their marketing budgets to online customer acquisition and 21 percent of marketing dollars to online customer retention, according to the survey. 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.

“What’s spearheading online retail sales growth is a tale of two shoppers that visit the web for very different reasons,” said Sucharita Mulpuru, principal analystForrester Research, a technology and market research company, 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.”

According to the survey, retailers report that search engine marketing continues to be the most effective way to reach new customers, citing 35 percent of sales coming from that initiative. As a result, nearly all online retailers surveyed (90%) use pay-for-performance search placement, and 79 percent said they will make this tactic 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.

Though free shipping offers have proven to get some consumers over the obstacle of shopping online in the past, the study showed that retailers’ are less interested in promoting free shipping options this year. While 85 percent of online retailers said they used some shipping with conditions promotions in the past, just 35 percent said that they would focus more on these types of promotions in 2008. Instead, retailers are eager to experiment with social computing initiatives to attract customers. Sixty-five percent and 55 percent of retailers respectively said that social network advertisements and widgets would be categories of increased focus this year.

However, social computing efforts to this point have been considered more effective for brand-building and less proven for driving revenue or sales conversion. Therefore, the report advises retailers to continue investments in proven techniques like email marketing and free shipping promotions to drive sales.