Shutterfly 2007 Annual Report Download - page 10

Table of Contents
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. We send a survey every month to
approximately 5,000 of our customers. We select customers who have made varying numbers of purchases from
us historically and who have purchased products from us within the prior 30 days. We typically receive a
response rate of approximately 15%. Based upon these surveys, we believe that our current customer base fits
the following profile: approximately 84% female, approximately 63% in the 25-44 age range and approximately
53% with children. Our surveys also indicate that the average household income of our customers is greater than
$75,000. 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
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