At Optaros, a global consulting and systems integration firm that creates online shopping solutions, Adam Michelson helps retailers integrate next-generation digital technologies and commerce platforms. He also helped set up members’ sites Rue La La and 36 Boutiques. Here, he discusses what multichannel retailers can learn from flash-sale sites and how ecommerce will evolve.
eMarketer: What are the key underpinnings of the flash-sale concept?
Adam Michelson:
Flash sales represent what I call retail 2.0 where there’s much less reliance on search engine-based marketing and much more on viral marketing which helps, from an ROI perspective, to drive down the cost of customer acquisition. There’s also a sense of exclusivity in belonging to a special group. From the consumer standpoint, impulse buying factors into it.
There are more than 50 flash sales sites now. The big four—HauteLook, ideeli, Rue La La and Gilt—are primarily apparel-driven. They offer a highly edited assortment of merchandise, mostly late-run merchandise in which consumers are getting a good deal. The goods purchased from them can be considered impulse buys. One Kings Lane is a leader in home goods but the problem with home goods is that a lot of those items aren’t impulse buys. Recognized brands and seasonal merchandise do well on flash sales sites overall.
eMarketer: How can multichannel retailers leverage the opportunities presented by online flash sales, members-only and private sales events?
Michelson:
If you’re a big-box retailer and you already have a large customer file or database with email, log-in and other customer information, you can leverage knowledge of your customers to drive store online shopping and in-store traffic.
You have to decide whether you’ll offer a deal of the day where at a given time of day, customers can get a deal or more of a private event that you’re invited to. The problem is you already have a file. So how do you invite somebody to something ‘exclusive’ when you already have millions of customers who are shoppers on your site? The issue for retailers is how to extend the customer profile and create a sense of exclusivity around it when you already have their profile. Retailers have to tackle that perhaps by drawing on loyalty rewards.
Flash sites are ‘private’ to keep the comparison shopping engines from looking at the deals. That’s the reason customers need to log in and help generate viral marketing rather than AdWords and AdSense-based marketing. Incentivizing customers to invite each other to be members also drives down customer acquisition costs. That’s all well and good if you’re starting a new website, but if you’re a big-box retail site, there’s no reward for the invitation to join. Because they have a large customer database, it’s not financially savvy to reward existing customers with a $10 coupon.
eMarketer: How would you characterize the challenge for big-box retailers?
Michelson:
The challenge for retailers is that private sales events are private because consumers have to join or be invited to them. Big-box retailers already have a customer database of online and offline shoppers so there’s no sense of exclusivity. They can try to leverage their existing customer base to create ‘private’ sales events but must come up with special incentives. They could incentivize customers based on whether they buy a certain item during a sale, maybe offer free shipping. But this is more of an incentive to convert to a sale, than an incentive to join something.
eMarketer: It would seem that big-box retailers would be in a good position to try limited-time sale events because they have so much customer loyalty data.
Michelson:
Yes, most of these retailers have an enormous capability to understand who’s loyal, how many times a year they’re shopping and what their average ticket price is. They have a lot of loyalty information and the ability to home in on it. I recommend that retailers use this information or an extension of loyalty as an incentive. So if you are being invited in, you know why, and if you invite somebody else, then I’ll give you ‘x’ number of loyalty points, or if you invite someone who converts, you’ll both get free shipping. It’s an extension of a loyalty program and a means of incentivizing customers.
eMarketer: Is there a way multichannel retailers can leverage the fact that they have physical store locations?
Michelson:
It’s a question of how they want to use their physical stores. Retailers could stage an in-store event along with an online simulcast event. For example, they could host an in-store fashion show and maybe it’s simulcast on the web 15 minutes early before the event starts. Then if you’re in the store, maybe you can shop 5 minutes early through your mobile device. If you’re online at home or in the office, you shop that way.
Post-purchase, retailers could plan, for example, a Calphalon sales event or a cooking demonstration. Customers go into the store and maybe Wolfgang Puck shows up to demonstrate how to use his product line. Or, perhaps a week before an event goes live online, customers can visit an in-store showcase to see and interact with a product. But, the big-box retailers can’t just look at this as a way of getting rid of merchandise or as a clearance channel. The customers won’t feel special.
eMarketer: Is the flash-sale market getting oversaturated?
Michelson:
The apparel segment still has a lot more room for growth, same with kids, moms, babies, teenagers and college. A lot of flash sites run the same brands over and over again. But if you find a new demographic, for example, new moms or GenZ (ages 18 to 24), there’s more room to grow. Lockerz is a flash site for Generation Z. There are sites dedicated to jewelry, handbags, shoes and travel. We’re also seeing more experiences being offered such as SniqueAway, a private-sale travel experience site.
There’s more niche capacity by demographic or by product line. And within the online group buying sales sites, big-box retailers will eventually host private events that are tied in with a local deal of the day via Groupon or similar provider. Internationally, the market’s definitely not oversaturated.
eMarketer: What are some best practices for retailers looking to leverage flash sales or limited-time sales?
Michelson:
Create a sense of exclusivity. That’s probably the biggest hurdle—defining what exclusive means. There is also the technical side—how do retailers handle sales spikes? If they’re lucky enough to be successful, then they’re selling out of 50% of their merchandise or more in the first hour. Retailers have to create a technical infrastructure because they might have 10 orders or more per second—that’s unheard of in ecommerce. Real-time inventory is required and that’s not easy. Having the ability to reserve items in a shopping cart is something that most stores don’t offer, but private event sites do. And what do they do with the items that didn’t sell?
You may get higher returns on a private sale site than a regular site because there are so many more impulse buys. Offering a return for store credit only helps ensure people don’t just buy and return.
eMarketer: What are the challenges for the big four flash-sale sites?
Michelson:
How do they sustain growth? Once a customer is invited to the site and they shop, they’ll never be invited to it again. A Groupon or LivingSocial customer returns and is invited back again more frequently than any of the private events sites because of the viral nature of the model itself. Another challenge is how to re-energize existing customers. Also, how do they take into account more than a single demographic? Gilt has created vertical categories—travel, cities, men, etc.
Gilt’s deal with Starbucks is a partnership to use the Gilt platform as an extension of Starbucks’ loyalty. That’s a different way of using the Gilt platform that monetizes it. But that’s a different question than re-energizing the two or three million members these sites already have. And that’s assuming less than 50% of the existing user base of all these sites is active. Maybe 10% to 20% of the user base is active. How do you invite or incent people to return?
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