Impact of E-Commerce Growth

As consumers' level of comfort with online functions such as e-mail and research continues to increase, so too will their level of participation in e-commerce. The next five years will see large growth in e-commerce - growth that could positively impact small businesses that have established themselves as legitimate, trustworthy merchants.

U.S. online retail sales are expected to reach $65 billion in 2004, and will continue to grow by a compound annual growth rate of 17 percent through 2008 to top $117 billion, according to a report issued last week from Jupiter Research, (a division of Jupitermedia Corp.,)..

According to the report, "Market Forecast: U.S. Retail 2004-2008," the growth in online retail will be due in part to new online buyers, not just veterans, who have come to embrace the medium. Jupiter expects that the online buying population will grow by 14 percent in 2004, representing 30 percent of the U.S. population. By 2008, one-half of the population will make purchases online.

As more and more new online users convert to online shoppers, small e-commerce businesses ultimately will benefit, said Jupiter Research analyst Patti Freeman Evans. "SB's benefit, as all businesses do, with greater adoption of online purchase and reduced fear. [However] Small retailers need to ensure that consumers have every reason to trust them," Evans said.

According to the report, during this time of new user growth, businesses should continue to target first-time online buyers as part of their new customer-acquisition efforts, as well as focus on retention marketing efforts in order to gain increased wallet share after a consumer's initial purchase. For small businesses, attracting these new buyers means getting the message across loud and clear that you are legitimate.

How do you convince potential customers that you are legitimate and trustworthy? "Be clear about security on all fronts, be sure to execute immaculately," said Evans. "Because [businesses] are small, their brand name may not be known to the breadth of consumers they may reach through online. So, they need to be sure they manage their messaging well."

Average Spending to Rise
Online retail growth will be fueled by another factor: increased average spending per buyer. In 2004, online buyers are expected to spend an average of $585 person, up from $540 per buyer in 2003. That trend in higher spending is expected to increase over the next five years: Through 2008, average spending per buyer will be close to $780 per buyer.

According to Jupiter Research, the increase in average spending is a reflection of the maturation of the online shopping market. Contributing factors that add to the likelihood that consumers will spend more online include more off-line merchants adding online components to their businesses, which gives consumers more reasons to shop online, and improved product comparison features.

In this realm, small businesses will face different challenges from their big business counterparts.

"What is unique to small businesses is that though consumers do look for items not readily available in their local market, they also want to trust the retailer from whom they purchase. So, small businesses need to be sure that they have legitimate and very strong vendor ratings in every place consumers may find their products, like comparison-shopping sites," said Evans. "Also, adding consumer feedback sections to their own site could help the credibility factor."

Evans said she also feels that acquisition marketing and awareness-building tactics are critical for small businesses. "Search engine marketing, along with comparison-shopping site listings and well-managed affiliate programs are ideal tactics and generate real ROI," Evans said. "It is important that small businesses allocate staff to manage these programs as that will pay off immediately."

Growth by Category
In the next five years, small business merchants should realize that not all retail categories will grow at the same rate. Jupiter Research's forecast groups retail categories in three growth modes: Plateau, Steep and Steady:

Categories in the Plateau group will experience compound annual growth rates of below 10 percent and include areas such as PCs, books and software.
Areas of steep growth (above 30 percent) are found primarily in the home and personal care categories such as home improvement, grocery and over the counter drugs
According to the report, the remaining categories comprise half of total online retail sales and include heavy volume players such as apparel and consumer electronics.

Ultimately, small businesses should understand that there is still double-digit growth coming from online sales, and that more and more people are choosing the Internet to make purchases. As such, online buyers will be adding more and more product categories to their online purchases. And by ensuring a solid position as a trusted merchant, small businesses will be able to reap the benefits of the coming growth in e-commerce.