Correlation is the term used to describe that the movement of two variables is somehow related to each other (Triola, 2008). We have a positive correlation in the case when if one variable increases than even the other increases too. Vice versa, when one variable increases and the other responds by decreasing, we have a negative correlation. In our case, PiggyBank is interested in estimating if there is any correlation between e-commerce retail sales and total retail sales.
The questions to be answered are of vital importance for a business. The correlation between the variables of total retail sales and e-commerce online sales can be decisive in determining the future of the company. They have to decide where to put their efforts; should they focus more on the on-line shopper market or at the “traditional” shoppers at retail stores? Should their marketing strategy advertise more on-line or not? Should their on-line products offerings increase or it is not that profitable?
There are different methods of doing the calculations but the most useful one is to do it in a Microsoft Excel sheet. It is important to notice that the correlation coefficient, the one that will show us if the variables are correlated or not, can have a value between -1 to 1. If it is 0, it means there is no correlation at all between the variables. If it is from 0 to 1, then it is a positive correlation, and from 0 to -1, it is a negative correlation (Lanthier, 2002).
First thing to do is to input the data provided by United States Department of Commerce for the total retail sales in one column and that of the e-commerce sales in another column. The data available from the Department of Commerce is from the fourth quarter of 1999 until the second quarter of 2004. After doing that we go to the formulas bar at the top of the sheet and select “More Functions”, then “Statistical” and then “Correl”. A box will prompt in which we will have to select the cell ranges to be calculated from each column of data. After doing this, just click “finish” and the correlation coefficient between the two sets of data we wanted to measure will appear.
In our case, the correlation coefficient is: 0.805787563. This means that the correlation between the two variables measured is positive. In other words, there is a connection between the rise (and fall) in total retail sales and e-commerce on-line sales. Graphically, if we put the values if billions of $ on the Y axis and the period of time from the fourth quarter of 1999 to the second quarter of 2004, this correlation is presented by an upward growing line, from left to right. In fact, the news released by the Department of Commerce shows this graphical representation of the correlation of the data. From this correlation the PiggyBank can conclude that the e-commerce sales are becoming an important share of the total sales in the country. The data shows that when there is growth in total sales, there is growth in on-line sales. An interesting example of this can be the data from the 4th quarter of every year since 1999 to 2003.
From the 4th quarter of 1999 to that of the year 2000, the e-commerce percent share of the total sales went up from 0.7% (in 1999) to 1.1% (in 2000). Also from the 4th quarter of 2000 to that of 2001 it went from 1.1% to 1.3%. From the 4th quarter of 2002 to that of 2003 it went up from 1.3% to 1.6%. And from the 4th quarter of 2002 to the 4th quarter of 2003 it went from 1.7% to 1.9%. This means that for a period of four years the market share (percentage of the total sales) of the e-commerce on-line sales has grown more than 2.71 times. It seems from the datathat the on-line sales are becoming an increasingly bigger “shareholder” of the total sales.
This information is important for the management team at the PiggyBank in order to decide where to put their time and energy the years to come. It seems profitable to invest marketing and advertising of products in e-commerce related platforms. The questions made at the beginning begin to have an answer. I think that their on-line product offerings should be increased in order for the company to have more possibility of entering this new market sector that is developing fast. And since it is a fast growing market sector it is in the best interest of the company to put some more efforts in advertising, product offerings and total marketing issues, as soon as possible. This as a result can payback the company with a well-positioned market position and a comfortable market share that will guarantee a steady flow of cash and liquidity.
References
U.S. Census Bureau (2004). United States Department of Commerce News. Web.
Lanthier, E. (2002). Correlation. Noth Virgnia Community College Website. Web.
Triola, M. elementary Statistics with Multimedia Style Guide (10th edition). Boston: Pearson Addison Westley.