How Much Is Too Much To Spend on E-Commerce?

A couple of years ago, money was no object when it came to e-commerce. Companies spent lavishly on technology in their rush to establish a Web presence. But the economic picture has changed significantly, and companies now are much more careful when it comes to such spending.

"The realization has sunk in that while B2C sales are growing and will continue to grow, they will not take over the retail world," Giga Information Group analyst Andrew Bartels told the E-Commerce Times.

With the possible exception of travel and -- to a certain degree -- books and music, online is still second best. "It has become clear that the online channel, in most instances, is never going to be the dominant channel," Bartels said.

Spending Slows

According to a recent Forrester report, spending on e-commerce technology will decline from 2001 levels of 3.5 percent of revenue, or $41 million, and will total just 3 percent, or $29 million, in 2002.

According to Gartner (NYSE: IT) Dataquest analyst Judith Rosall, worldwide spending on e-commerce software applications fell 30 percent in 2001.

"There is no question the economic downturn played a major factor in the postponement of e-commerce software-related initiatives among businesses," Rosall told the E-Commerce Times.

Spending on e-commerce technology has "moved from hyperdrive to a much more measured process," Bartels said. The trick is to figure out how much must be spent -- and in what areas -- to keep a company competitive.

Investing Proportionally

Faced with the realization that e-commerce is not the be-all or end-all of retail, companies have started looking more closely at their e-commerce budgets.

"The channel has not gone away, but now companies are investing in the channel commensurate with its value," Bartels noted.

Rosall said e-commerce spending decisions are being driven more and more by expected return on investment.

"An early (four- to six-month) return on investment of approximately 10 to 22 percent would be an early indicator that a specific e-commerce software initiative has significant potential to affect a business' bottom line," Rosall said.

Concentrate Spending

According to Rosall, companies should focus their spending on improving customer satisfaction and loyalty, reducing sales and marketing costs, and making the process of online procurement and supplier management more efficient.

Another area in which companies likely will concentrate e-commerce spending is tracking. While online merchants have not taken over the retail world in the way many thought they would, a growing number of consumers are using the Web to research products before making a purchase. Some even use the Web to find a product, then go to a brick-and-mortar outlet to make the purchase.

Companies need to do a better job of tracking how many leads a site generates and whether those leads result in offline sales. "The real value lies not in the transaction but in the leads, but they are having a hard time tracking those," Bartels said.

For companies that have both a brick-and-mortar presence and a Web site, stores generally deliver 90 to 95 percent of the sales and virtually all of the profits. Therefore, Bartels noted, the value of a Web site will be determined by how many leads it delivers to other sales channels. Internet companies that devote resources to developing good lead-tracking systems will be more successful than those that do not.

From B2C to B2B

Another way in which e-commerce spending patterns will change, according to Bartels, is in a movement away from B2C (business-to-consumer) and toward B2B (business-to-business).

Giga Information Group has predicted that e-commerce spending will rebound by 2003 to the $1 billion level first reached in 2000, but only about $150 million of that sum will be devoted to B2C e-commerce technology.

In the future, the lion's share of e-commerce spending will focus on B2B, on systems that can be used to sell online to both consumers and corporations, and on companies that use Web sites to generate sales leads.

That said, there still will be a need for straight B2C e-tailers, and those companies should spend money to make their sites as easy to use as possible.

"It is important for companies to cater to those consumers who don't feel the need to trek all the way to the store and are perfectly happy to buy something sight unseen," Bartels said.