Why E-Commerce Is Flourishing

Recent headlines that retail sales shrank in June for the second straight month were a grim reminder of how the Great Recession has torpedoed traditional retailers. Thousands of stores closed last year, and chains ranging fromCircuit City to Filene’s Basement declared bankruptcy. But shopping is flourishing someplace else: the Internet.

Over the last decade, e-commerce sales have grown on average 19% per year, far faster than offline retail. Even during the dark days of 2009 when retail sales shrank 2%, e-commerce vendors grew sales 1.4%, capitalizing on price-sensitive and increasingly Web-savvy consumers to continue to gain market share. So while traditional retailers have been struggling to survive, forward-thinking online merchants have unleashed a wave of innovation that is improving the economics of e-commerce.

Until recently, when it came to landing new shoppers, e-tailers had fallen into a rut. They relied heavily on search engine marketing. It’s popular because it delivers customers reliably, but there is a marginal cost associated with each new customer. That cost can grow at periods of peak demand.

Online merchants, emulating their online media counterparts, have gradually recognized the value of search engine optimization to drive free users to their sites through natural search. Amazon.com and shopping search sites like TheFind.com and ShopStyle have led the way. TheFind.com now has 16 million visitors each month, almost entirely from search engine optimization. In an Internet Retailer survey, 73% of e-commerce vendors cited better search engine optimization as a website design priority in 2009.

Meanwhile, social media has burst on the scene with the promise of more free (aka viral) traffic. Facebook now boasts 500 million active worldwide users (150 million in the U.S.), and 56% of online shoppers use Facebook. Social marketing alternatives are emerging, including allowing customers to post their purchases or their “likes” to their Facebook walls, or encouraging them to invite friends to participate in a discounted group purchase. Groupon presents to its subscribers a deal of the day from a local business, such as a restaurant or spa, but the deal does not “tip” until enough people have signed up for it, creating an incentive for users to tell their friends about the deal.

Though many retailers have not yet been able to drive meaningful traffic from social media, 11% of them consider social media to be their most effective acquisition tactic, and that number is likely to grow.