Shutterfly 2010 Annual Report Download - page 34

In addition to driving lower customer acquisition costs through viral marketing, our customers provide input on new features, functionalities
and products. Close, frequent customer interactions, coupled with significant investments in sophisticated integrated marketing programs, enable
us to fine-
tune and tailor our promotions and website presentation to specific customer segments. Consequently, customers are presented with a
highly personalized Shutterfly shopping experience, which helps foster a unique and deep relationship with our brand.
Basis of Presentation
Net Revenues. Our net revenues are comprised of sales generated from personalized products and services (“PPS”),
prints and commercial
printing services.
Personalized products and services
Our personalized products and services revenues are derived from the sale of photo-
based products, such as photo books, greeting
and stationery cards, calendars and other photo-
based merchandise and ancillary products and services, and the related shipping
revenues. Revenue from advertising displayed on our website and referral fees are also included in PPS revenue. Our referral fees have
been approximately 3.0%, 3.1% and 2.5% of our net annual revenues for 2007, 2008, and 2009. Our referral fee program will be
discontinued effective March 31, 2010. As a result, referral fee revenues during 2010 are expected to total less than 1% of total net
revenues and no referral fee revenues are expected subsequent to March 31, 2010.
Prints
We also generate revenue from photo prints and the associated shipping revenue. Photo prints consist of wallet, 4x6, 5x7, 8x10,
photocards and large format sizes.
Commercial Print Services
In order to use available print capacity during low volume periods and to leverage our large installed base of existing digital
printers, we began providing commercial printing services in 2008. In 2008 and 2009, we entered into various strategic relations with
marketing companies to provide high quality printing services. We continue to focus our efforts in expanding our presence in this
market.
All of our consumer revenue is recorded net of estimated returns, promotions redeemed by customers and other discounts. Customers place
orders through our website and pay primarily using credit cards. Advertising and commercial print customers are invoiced upon fulfillment.
Our business is subject to seasonal fluctuations. In particular, we generate a substantial portion of our revenues during the holiday season in
the calendar fourth quarter. We also typically experience increases in net revenues during other shopping-
related seasonal events, such as Easter,
Mother’s Day, Father’
s Day, and Halloween. We generally experience lower net revenues and revenue growth during the first, second and third
calendar quarters and have incurred and may continue to incur losses in these quarters. Due to the relatively short lead time required to fulfill
product orders, usually one to three business days, order backlog is not material to our business.
To further understand net revenue trends, we monitor several key metrics including:
Total Customers.
We closely monitor total customers as a key indicator of demand. Total customers include the number of
transacting customers in a given period. We seek to expand our customer base by empowering our existing customers with sharing and
collaboration services (such as Shutterfly Gallery and Shutterfly Share Sites), and by conducting integrated marketing and advertising
programs. Total customers have increased on an annual basis for each year since inception and while we expect this trend to continue, the
number of customers is dependent on whether we are successful in executing our strategy in addition to the conditions of the overall
economic environment.
Average Order Value.
Average order value is net revenues, excluding revenues from our commercial print initiative, for a given
period divided by the total number of customer orders recorded during that same period. We seek to increase average order value as a
means of increasing net revenues. Average order value has increased on an annual basis for each year since 2000, and we anticipate that
this trend will continue in the future as consumers shift from prints into personalized products and services. As a result of discontinuing
our referral fee program, effective March 31, 2010, we expect our average order value growth will moderate as a result of the decline in
this revenue source.
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