Shutterfly 2012 Annual Report Download - page 16

increased costs on to our customers. The resulting increased expenses and/or reduced income would
negatively impact our operating results.
If the economic recovery continues to be slow, or if the economy experiences a prolonged period of
decelerating or negative growth, our results of operations may be further harmed.
Competitive pricing pressures, particularly with respect to pricing and shipping, may harm our business and results
of operations.
Demand for our products and services is sensitive to price, especially in times of recession, slow
economic growth and consumer conservatism. Many external factors, including our production and
personnel costs, consumer sentiment and our competitors’ pricing and marketing strategies, can
significantly impact our pricing strategies. If we fail to meet our customers’ price expectations, we could
lose customers, which would harm our business and results of operations.
Changes in our pricing strategies have had, and may continue to have, a significant impact on our net
revenues and net income. From time to time, we have made changes to our pricing structure, specifically
for 4x6 prints, in order to remain competitive. Most of our other products, including photo books,
calendars, cards and stationery and other photo merchandise are also offered by our competitors. During
the fourth quarter of 2011, many of these competitors discounted those products at an unprecedented
level. As a result, we also changed our discounting strategy, which impacted our acquisition of new
customers, average order value, net revenues, gross margin, and our adjusted EBITDA and net income
profitability measures. If in the future, due to competitor discounting or other marketing strategies, we
significantly reduce our prices on our products without a corresponding increase in volume, it would
negatively impact our net revenues and could adversely affect our gross margins and overall profitability.
We generate a significant portion of our net revenues from the fees we collect from shipping our
products. For example, shipping revenue for the Shutterfly brand website represented approximately 16%,
15% and 14% of our net revenues in 2012, 2011 and 2010, respectively. We offer discounted or free
shipping, with a minimum purchase requirement, during promotional periods to attract and retain
customers. If free shipping offers extend beyond a limited number of occasions, are not based upon a
minimum purchase requirement or become commonplace, our net revenues and results of operations
would be negatively impacted. In addition, we occasionally offer free or discounted products and services
to attract and retain customers. In the future, if we increase these offers to respond to actions taken by our
competitors, our results of operations may be harmed.
We face intense competition from a range of competitors and may be unsuccessful in competing against current and
future competitors.
The digital photography products and services industries are intensely competitive, and we expect
competition to increase in the future as current competitors improve their offerings, including developing,
acquiring and expanding mobile offerings, and as new participants enter the market or as industry
consolidation further develops. Competition may result in pricing pressures, reduced profit margins or loss
of market share, any of which could substantially harm our business and results of operations. We face
intense competition from a wide range of companies, including the following:
• Online digital photography services companies such as Snapfish, which is a service of Hewlett-
Packard, American Greetings’ Webshots brand, Vistaprint, SmugMug, and many others;
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