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'Pure Plays' vs. Omni Channel in AdWords/adCenter

  |  June 24, 2011   |  Comments

It's time for the majority of multi-channel retailers to understand how consumers shop, and take stock of their true missed opportunities.

Can multi-channel or omni-channel retailers beat the "Internet pure plays" in PPC SEM and in overall marketing? Perhaps. If you are involved in online commerce in any way, chances are you are bidding against Amazon, the gorilla of Internet "pure plays." Many Internet retailers don't know whether to call Amazon a partner, a competitor, or both. This sets the stage for an interesting turn of events that may happen within the near future: the imposition of "Amazon taxes" across the U.S., leveling the sales tax playing field.

You ask, "what does the collection of sales tax by a retailer have to do with PPC search?" and you'd be right, except for the fact that in an auction-based media environment, particularly search, the merchant with the best overall profit advantage can afford to out-bid everyone else and still have a greater ROI. Amazon's advantages are multiplicative and significant. Amazon has amazing buying power with suppliers, a killer logistics system, amazing CRM, fascinating personalization, effective email marketing, and one of the broadest and most comprehensive SEM programs; plus, for many states (in the U.S.), it doesn't collect local sales tax. Together, these give Amazon a huge advantage in the auction-based-media ecosystem. Just how much of this advantage comes from the sales tax pricing advantage (to the consumer) isn't 100 percent clear.

I live in New York State, where Amazon has collected sales tax for some time, and I use Amazon a lot, particularly due to its "Prime" program. Sales tax has had little or no chilling effect on my Amazon purchases, but I am far from the typical shopper, and Amazon is fighting the level-playing-field tax proposals, so there must be a significant impact when all customer are paying tax at Amazon just as they do with local purchases (or online purchases from retailers who have some nexus in their state).

This hot topic of taxation impact and competitive advantages came up this week at the Goldman Sachs dotCommerce investor event in NYC where I was a panelist. Interestingly, many of the companies presenting both individually and as part of panels were positioning themselves as being in a solid leadership position due to their scale, their operational excellence, or some efficiencies that would be difficult to replicate. These included non-retailers like Zipcar (before I had a car in NYC I was an active Zipcar user and this company has indeed nearly perfected on-demand vehicle rental). Zipcar President Mark Norman talked about the focus the company has on its specific segment and how it isn't worried about the regular rental car companies getting into the self-serve, short-term rental business. Given all of its advantages as presented, I'd expect Zipcar to be bidding aggressively on some keywords for customer acquisition in its biggest cities. So far, I haven't seen this, even for terms such as "hourly car rental," where Zipcar has high organic rank (yes, even having top organic rank doesn't necessarily mean you shouldn't buy the ad). Perhaps other forms of marketing deliver a lower cost per new customer.

The spin of Fresh Direct CEO Jason Ackerman (a pure play itself) was that the inefficiencies of getting fresh food from its source to your refrigerator (while still fresh) could, with the right infrastructures and systems, be dramatically improved upon while improving gross margins. As a Fresh Direct customer, I can believe it. However, Fresh Direct still doesn't get most of my fresh grocery shopping share of wallet, because some forms of produce shopping deliver a level of satisfaction that can't be overcome by freshness, convenience, and price (the perfect cantaloupe or pineapple, pears that have the right number of days left before becoming perfectly ripe).

Therein lies the challenge for many pure plays. Retail shopping is an experience. Some people enjoy shopping, and when you look at the conversion rates of online shopping vs. the conversion rates of the identical brick-and-mortar counterparts, the percentages are quite telling. The CEO of Shopkick, Cyriac Roeding, shared some of this data while describing his mobile-to-local incentive program business at the Goldman event. Stores convert shoppers at a much higher rate and therefore perhaps more multi-channel and omni-channel retailers should be focused on both online and offline commerce facilitation within their online presence.

The concept of omni-channel retail brings us to another session at the dotCommerce event: the joint Macy's (Peter Sachse, chairman, CEO, macys.com )/Bloomingdales (Bruce Berman, president, Bloomingdales.com) conversation with the Goldman Sachs analysts (and audience). In this conversation, it became clear that both companies were confident that they had some advantages as brick-and-mortar players with a strong and growing e-commerce business that even Amazon would have difficulty matching. Not only are they adept at fulfillment and order processing from centralized warehouses, but they have a very broad retail footprint. Let's think about that retail footprint and evaluate it from the perspective of PPC bid leverage.

A retail selling location gives you:

  1. Offline conversion from site visitation to store. Some people use the Internet to research goods and then visit a store (regardless of which online source they used for the research). Clearly, the most likely store to get the visit after a searching and browsing experience is the one whose site was visited and has a local footprint, plus, perhaps, the ability to assure the customer that the item (or a large selection of similar items) is in stock. If people prefer the retail locations over the stores they visit online, this becomes a powerful lever in increasing the reserve price on a bid.
  2. Salespeople. For many types of products, the presence of a knowledgeable, personable, and trained salesperson can dramatically increase retail conversion rates. When stores begin allowing for in-store ordering of products that are out of stock or otherwise not available from a specific retail location (or any retail location), the conversion rate tied to the original visitation of a site via search is even higher than it would be in the first instance.
  3. Secondary warehouse space. It's easier to achieve just-in-time availability of inventory when your stores and warehouses work in synch and the retail ecosystem becomes agnostic to where the item ships from. Add yield management to this equation and you are even further ahead; this process depletes the overstocked retail stores of their excess inventory at regular pricing instead of clearance pricing.
  4. No return shipping costs. Consumers don't count the cost of their own time or gas when returning e-commerce orders to the store. This makes the perceived cost of the return for the consumer lower.
  5. Customers making in-store returns. These people are highly likely to buy something to replace the return. Returns become a good thing (or at least a less-bad thing) for the retailer.

Wow, once the politics of retailing organizations is smashed apart at the highest levels, and a holistic frame of mind pervades those retailers possessing both an online and offline presence, a killer advantage can be obtained. However, doing so will require that they also break down the silos between branding and direct response ad spending, as well as the artificial silos between online and offline retail.

So what does better multichannel tracking look like? For those retailers with large store footprints and an online e-commerce presence, accurately tracking in-store purchases originating from online search is a big challenge, but a highly accurate number isn't needed to take a retailer's online marketing to a new level. Even anecdotal evidence, coupled with some simple experiments, would allow multi-channel retailers to get a really good estimate of the online-to-offline consumer behavior patterns. For example, split off a major category and only advertise it online in half of the geographies where you have stores; and measure changes in in-store sales for the category or categories over the test period. Or do the full campaign geo-targeted for two weeks, full-on and full-off in a single geography, and then rotate the test to the next location.

It's time for the majority of multi-channel retailers to understand how consumers shop, and take stock of their true missed opportunities. They will find that online marketing and paid search in particular plays a far greater role in driving sales than they ever thought possible.

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ABOUT THE AUTHOR

Kevin Lee

Kevin Lee, Didit cofounder and executive chairman, has been an acknowledged search engine marketing expert since 1995. His years of SEM expertise provide the foundation for Didit's proprietary Maestro search campaign technology. The company's unparalleled results, custom strategies, and client growth have earned it recognition not only among marketers but also as part of the 2007 Inc 500 (No. 137) as well as three-time Deloitte's Fast 500 placement. Kevin's latest book, "Search Engine Advertising" has been widely praised.

Industry leadership includes being a founding board member of SEMPO and its first elected chairman. "The Wall St. Journal," "BusinessWeek," "The New York Times," Bloomberg, CNET, "USA Today," "San Jose Mercury News," and other press quote Kevin regularly. Kevin lectures at leading industry conferences, plus New York, Columbia, Fordham, and Pace universities. Kevin earned his MBA from the Yale School of Management in 1992 and lives in Manhattan with his wife, a New York psychologist and children.

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