E-tailers Eye Profits as Belts Tighten

Online retailers are cutting costs and paying more attention to how they spend their marketing dollars, according to a quarterly survey released Wednesday by the Boston Consulting Group and Shop.org.

As a result of this shift, the survey found, customer acquisition costs fell in the second quarter, as order conversion and loyalty rates rose.

The results were based on responses from 66 North American e-tailers.

'More Focused Approach'

"Given the tighter capital markets, online retailers are being more focused in their approach to marketing as they strive to find the most efficient ways to acquire and retain customers," said James Vogtle, director of e-commerce research at Boston Consulting. "We are beginning to see the results of this more focused approach, as online retailers have improved performance on the key metrics that have the largest impact on the bottom line."

Added Vogtle, "Online retailers will need to continue with this disciplined approach in order to reach profitability."

The survey found that customer acquisition costs have fallen steadily so far in 2000, declining from a high of $71 (US$) during the fourth quarter of 1999 to $40 in the second quarter of this year. Still, overall acquisition costs are above the $35 reported in the third quarter of 1999.

Online vs. TV Ads

The firms that compiled the survey credited the decline in part to a shift toward online advertising and away from more expensive television commercials. Companies spent about 59 percent of their marketing budgets on online advertising in the second quarter, up from 49 percent in the first, the survey found.

In addition, the researchers said, e-tailers are focusing more on customer retention and spending less of their advertising dollars on "pure brand awareness."

"The average online retailer requires three purchases to break even on the acquisition cost of each new customer," said Kate Delhagen, chairman of Shop.org's committee on Internet shopping research. "With the high cost of acquiring new customers, many online retailers are focusing their efforts on increasing the frequency of purchases from existing customers, in order to reduce acquisition spending and achieve profitability more quickly at an operational level."

So Far, So Good

So far, the strategy seems to be working. Order conversion rates -- figures derived using the number of orders received divided by the total number of visits over a given period -- rose to 1.9 percent in the second quarter from 1.8 percent in 1999.

Eighty-six percent of the e-tailers surveyed said they have specifically addressed the issue of profitability. Yet only 11 percent said they had laid off workers as a way to improve profits.

Twenty-nine percent of the survey participants said they were deferring site upgrades as a way to save money. However, the researchers warned that this tactic could backfire in the long run, as customers are turned off by their online shopping experiences.