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In a bid to achieve profitability, e-tailers slashed their
spending on offline advertising during the third quarter and,
as a result, cut their customer 
acquisition costs in half,
according to a study released Tuesday by Shop.org and the Boston Consulting Group (BCG).
The study also found that 95 percent of e-tailers surveyed said that they are improving customer service capacity to handle the expected influx of holiday shoppers.
"With all the gloom and doom we've been hearing about online retailing vis-a-vis the stock market, it's encouraging to see that a majority of online retailers continue to focus on improving business processes to make themselves stronger," said Kate Delhagen, chairman of Shop.org's Committee on Internet Shopping Research.
Targeted Advertising
Earlier research by BCG and Harris Interactive predicted that up to 70 percent of online Americans are expected to do at least some holiday shopping online. Additionally, last year's online holiday shoppers are expected to spend an average of US$240 online this year, up from $170 in 1999.
Although 89 percent of retailers surveyed by Shop.org plan to launch holiday marketing and promotional campaigns, only 4 percent plan to increase their TV advertising budget. Instead, 62 percent of e-tailers said that they will rely on direct online marketing campaigns via e-mail.
Other ways that e-tailers plan to lure consumers to their virtual stores include: selling gift certificates, 54 percent; obtaining prominent placement at portals, 39 percent; signing new partnership deals with content sites, 36 percent; and offering a free gift with purchase, 29 percent.
Free shipping, though expensive, is still a favored ploy. Twenty-eight percent of e-tailers said they plan to offer conditional free shipping and 12 percent said they will offer free shipping with no strings attached.
Delhagen said that the ongoing dot-com market correction is far from having a negative effect on online retailing as a whole, and has led online retailers to renew their focus on customer service, cost reduction and profitability.
Customers Online
Spending less money offline -- and more online -- means that customer acquisition costs have dropped. Last year, e-tailers spent 62 percent of their marketing budget on offline media campaigns, including magazine ads and television commercials. During the fourth quarter of 1999, customer acquisition costs skyrocketed to $71 per customer.
During 2000, the portion of the advertising budget spent offline declined steadily, dropping to 51 percent in the first quarter, 41 percent in the second quarter, and just 36 percent in the third quarter. Correspondingly, customer acquisition costs dropped to $45 in the first quarter, $40 in the second quarter, and $20 in the third quarter. Thus, fourth quarter figures this year are expected to be significantly lower than last year's.
Still, despite the decreased spending for offline ads, retailers who participated in both the Q2 and Q3 surveys reported a 28 percent increase in new customers.
"We've seen the industry mature dramatically over the last year," said James Vogtle, Director of E-Commerce Research at BCG. "Online retailers have hit upon the right marketing mix to draw customers to their sites without breaking the bank -- and are seeing immediate results for their efforts."
Ready for Holidays
E-tailers are not only working to cut costs this holiday season, are also working to improve the online shopping experience for consumers. For example, more than half of the e-tailers said they added new product categories in time for the year-end rush.
Additionally, 70 percent of the 94 e-tailers surveyed said that they have redesigned their Web sites to either improve navigability or add holiday-specific features.
Sixty-five percent said they had increased their capacity to
provide customer service, while 62 percent said they had increased their
fulfillment capacity and inventory investments.
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