What Matters Most in Internet Retailing

Online retailing is far and away the fastest growing retail sector in the United States. The growth is being fed by two forces: (1) traditional retailers are getting their “Internet acts” together, and (2) “pure play” retailers are becoming increasingly innovative.

The authors studied two groups: online retailers selling popular-brand consumables for the home, such as laundry detergent, pet supplies and diapers (represented by Netgrocer.com and Diapers.com); and online retailers selling specialty items, including fashion eyeglasses and apparel for men (represented by WarbyParker.com and Bonobos.com). They came up with a set of findings that may have important implications not just for pure-play Internet retailers but for more traditional retailers, too. Among them:

Individual consumer acceptance depends on offline shopping costs. For Internet retailers, the best market opportunities are with customers in locations where offline retail shopping is limited and costs (including sales tax) are high.

Sales evolution is structured and predictable. Although initial online sales in a particular region, and some geographic variation in sales across regions, may be driven by offline product costs, growth is fueled by the sharing of information among friends and neighbors. The authors’ research on Netgrocer.com, an online retailer that delivers groceries, found that ZIP codes with lots of new customers tended to be adjacent to areas that had high concentrations of customers in earlier periods.

Migrating from “good” to “great” requires expansion to niche locations. Although sales emerge first in areas where customers face high offline shopping costs and are propagated through local customer interactions, in order for online retailers to extend their reach they need to tap into hundreds or thousands of markets that individually represent few sales but collectively add up to significant numbers.

Different locations require different customer acquisition strategies. In ZIP codes with a high physical density of customers, offline word of mouth can be particularly powerful. Traditional print advertising tended to work well in less dense environments.