The New Math

Social networks are a new phenomenon. Facebook was created in 2004, Twitter in 2006 and Pinterest and Instagram in 2010. It's taken retailers a while to figure out how to drive traffic and sales from social networks, but they're starting to get the hang of it.

That's particularly true of smaller, web-only retailers that don't have big budgets to make a name for themselves through search marketing or big media campaigns. By necessity, some of these e-retailers are putting their focus on social media marketing— which often is free apart from the staff time required— and they're seeing very real financial results.

Consider: Both pet supplies merchant PetFlow.com and flash-sale e-retailer Fab.com will generate one-third of their revenue in 2012 from visitors arriving on their sites from Facebook, Twitter and Pinterest. For eyewear retailer Coastal Contacts Inc. that figure is likely to be around 5%, still a substantial sum for a web retailer that generated $177 million in sales online in 2011.

These three online-only merchants demonstrate that aggressive social media marketing programs can lead directly to traffic and sales. And, in fact, they're the three highest-ranking retailers in the Internet Retailer Social Media 300, a new research guide that for the first time ranks retailers by the percentage of traffic to their web sites from social networks—a measure of the effectiveness of their social media strategies. PetFlow gets 30% of its total traffic from social networks, while Fab.com and Coastal.com garner 25%.

Those types of results, while certainly not the norm, are why 52% of retailers in a recent online survey from digital marketing firm Webmarketing123 said they planned to increase their social media marketing budgets in 2013, outpacing the percentage that plan to increase spending on search engine optimization (45%) and pay-per-click advertising (40%). Social media spending by all marketers in the United States will near $5 billion by 2016, according to Forrester Research Inc.

Social media budgets are rising because retailers, particularly small and mid-sized merchants, are finding that social media offers a cost-effective way to generate results. Most retailers can't match, for example, the $3.9 million Amazon.com Inc. spends each month to drive traffic via paid search ads, according to search marketing firm ROI Revolution Inc. But they can channel their passion for, and their knowledge about, the products they sell into engaging campaigns on social networks and innovative design elements on their own e-commerce sites that integrate the comments, sharing and purchases of their socially connected fans. In doing so, they're driving measureable marketing returns.

They're also adapting quickly to new opportunities to market via social media. The social networks are working hard to monetize their huge audiences—U.S. online consumers spend 20% of their PC time on the Internet on social networks and 30% of their time on mobile devices, according to web measurement firm the Nielsen Co.—and leading retailers in the Internet Retailer Social Media 300 have been among the first merchants to effectively employ some of the new ad formats and marketing tools Facebook and the others are introducing.

Putting social first

Because social media marketing remains relatively affordable, it isn't surprising that the overwhelming majority of those generating significant returns from social media are small to mid-sized e-retailers that operate exclusively online. With the exception of Coastal Contacts, nine of the top 10 merchants in the Social Media 300 brought in less than $30 million in online sales in 2011, and none of the top 10 operates physical stores.

The retailers most adept at driving traffic from social networks to their sites in the Social Media 300 represent a diverse array of categories. But they've each found innovative ways to make their sites and marketing initiatives social, says Jon Kubo, chief product officer of social commerce platform provider 8thBridge and the former head of e-commerce at teen apparel retailer The Wet Seal Inc., No. 31 in Social Media 300. "These guys have social in their DNA and that's very important."

For most, direct sales from social media—defined as transactions completed on an e-commerce site after a consumer clicks from a social network—are only one part of the social puzzle. As a whole, the 300 e-retailers in the Social Media 300 will bring in a combined total of $1.6 billion in 2012 sales from visitors arriving on their sites from social networks. For perspective, that's less than 1% of the $224.2 billion of the total e-commerce spending projected for 2012 by online marketing research firm eMarketer Inc. and about the same as J.C. Penney Co. Inc., the 20th largest merchant in the Internet Retailer Top 500 Guide, generated online in 2011.

Beyond sales, the retailers also use social to reinforce their customer loyalty strategies and lead shoppers to click over to their sites. Roughly 18.5% of traffic to the top 10 retailers in the Guide stems from social networks. For the sake of comparison, that's more than the 16% Apple.com, the third-largest North American retailer in terms on online sales, gets from a combination of paid and organic search.

Driving sales

There are some clear e-retail leaders that know how to drive sales through social, including specialty and gift e-retailer Fab.com, which ranks No. 2 in the Social Media 300 (see chart for the top 10 social commerce retail leaders). "We are essentially an e-commerce site based on Facebook," says co-founder Jason Goldberg. That helps explain how the retailer, which launched in 2011, was on track late last year to net $50 million in sales from shoppers coming from social networks.