Shutterfly 2008 Annual Report Download - page 6

Broad offering. We offer a wide variety of premium products to customers, including prints and photo-
based products that include, but are not limited to, greeting cards,
calendars, photo books, mugs, mouse pads, frames, photo albums and scrapbooking products and accessories. In addition, we provide a number of valuable tools and services,
such as the ability to upload and edit photos online, share photos with friends and family and store an unlimited number of photos on our system at no cost. With many creative
options from which to choose, we enable customers to become engaged in the Shutterfly experience and feel a sense of pride in their creations.
Exceptional quality and service.
We have built strong relationships with our customers who trust us to preserve and protect their memories in a central storage repository.
We enable customers to enhance, share and make projects with their photos at their convenience. Our focus on ease of use, image quality, secure photo storage, high-
quality
products and first-
rate packaging has established Shutterfly as a premium brand. Our customers have come to expect the best quality and service from us. This trust is maintained
by fast, consistent fulfillment times, responsive customer service and continuous innovation.
Customer-focused approach. The entire Shutterfly customer experience reflects our customer-
centered approach. Membership is free and offers customers the ability to
upload, edit, store and share an unlimited number of photos. Membership is not required to view shared pictures, which can be viewed with a simple click. We conveniently mail
orders to our customers’ homes or offices, or directly to a gift recipient. We also offer a year-round direct-
mail greeting card service where customers upload their electronic
address books to Shutterfly and we mail their cards and party invitations on their behalf. We take special care to focus on our customers’
requests for new features and
functionality, products and services.
The Shutterfly Solution
We have developed a portfolio of products and services along with specialized manufacturing capabilities that allow us to offer consumers an easy, convenient and fun way to
enjoy, share and preserve their memories. We satisfy traditional consumer needs —
by introducing consumers to new forms of communication and creative expression through our
website features and functionality, photo prints, and personalized photo-
based products and services. We also provide photo printing, storing and sharing. We believe that many people
are intimidated by the process of creating photo-
based products or merchandise or fear that it will take too much work. We believe that we have removed much of the difficulty and
intimidation of the process and have made it easy and enjoyable. In addition to these consumer benefits, we believe that our business model is supported by the following
characteristics:
Viral network effect.
We benefit from a viral network in several ways. When our existing customers upload and share their personal memories through photos, they are
providing compelling user-
generated content that attracts their friends and family to our website, thus enlarging our network of users and potential customers. This implicit
endorsement, coupled with user-
friendly policies, such as not requiring share recipients to register to view pictures, reinforces our trusted brand and leads to lower customer
acquisition costs. In addition, as our customers create and give thoughtful and unique physical gifts such as greeting cards, calendars and photo books, these products create
numerous opportunities for potential customers to interact with our brand. Many of our customers also use our website to create community-
oriented products such as a photo
book celebrating a school play or a yearbook for their children’
s soccer team, and they often proactively introduce and sell these items to larger groups of potential new
customers. As our products and services delight our customers, they often become enthusiastic evangelists for Shutterfly and introduce our products and services to their friends
and family through word-of-mouth referrals and endorsements.
Attractive target demographics reflected in our loyal customer base.
Our customers have described themselves as being interested in maintaining personal connections with
friends and family, wanting to tell stories, wishing to preserve their memories for themselves and their children and wanting an offering that is intuitive and easy to use. As a
result, we believe that they are looking for an easy and convenient way to be both thoughtful and creative with their memories. Our customers use our website to share, enhance
and preserve memories from vacations, holidays and family events and to create gifts for events such as birthdays, weddings, anniversaries, Halloween, Hanukkah, Christmas,
Valentine’s Day, Easter, Mother’s Day and Father’
s Day. We believe that our customer loyalty is also aided by high switching costs. If a customer were to leave Shutterfly, he or
she would have to spend significant time uploading and organizing photos on a new service.
Premium pricing power.
We believe that we are able to maintain premium pricing power for many of our products because of our market position and the loyal customer
base we have created. We believe that our market position and loyal customer base exist because we have differentiated ourselves in the marketplace by delivering high-
quality
products, outstanding customer service, an intuitive and easy user experience and continuous innovation across our products and services.
Deep understanding of our customers.
Customer insights are an important source of new product and service innovation for us, and we continually strive to understand our
customers’
needs in order to improve customer satisfaction. We invest significant time and resources to understand and address the needs of our customers through market
research, focus groups, customer surveys, usability testing, customer response to promotions and customer service interactions. We believe a coordinated focus on understanding
the customer allows us take measures to increase customer loyalty, consumer awareness of Shutterfly, customer satisfaction and repeat purchases.
Vertical integration and superior technology.
We derived approximately 82% of our net revenues in 2007 from products we manufactured in our Hayward, California and
Charlotte, North Carolina facilities. Our vertically integrated and highly technical manufacturing approach provides quality control, agility in rolling out new products and ability
to secure capacity at critical peak demand periods. We believe that vertical integration provides us with quality, cost, flexibility and innovation advantages, including:
We have devoted more than eight years to developing our proprietary software, technology and production systems that we believe give us an advantage over our competitors. It is
our intention to continue investing in and protecting our proprietary technology, platforms and processes that help us differentiate ourselves from the competition, innovate, and control
costs.
•
greater consistency and quality of output;
•
increased ability to control and optimize costs for raw materials and production;
•
fully automated image processing and print scheduling;
•
more flexibility to provide rapid, responsive order fulfillment and processing;
•
assured high
-
quality capacity, even during peak demand such as the fourth quarter holiday season;
•
additional insights into new and existing photo products and production processes;
•
rapid prototyping, testing and refinement of new products and services; and
•
the ability to address customer inquiries quickly.
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