Internet Retailers Look Toward Profitability

Customer acquisition costs have decreased and order conversion rates have risen, signs that online retailers are taking steps to increase overall profitability, according to a survey by Shop.org and The Boston Consulting Group (BCG).

“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 BCG. “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 — customer acquisition cost, conversion rates, and loyalty rates. Online retailers will need to continue with this disciplined approach in order to reach profitability.”

The survey is based on responses from 66 North American online retailers, and it shows that customer acquisition have declined from a high of $71 during Q4 1999, to $45 in Q1 2000, to $40 in Q2. Despite the significant decline, overall customer acquisition costs remain higher than in Q3 1999 ($35). According to the survey, the decline in customer acquisition costs is due, in part, to a shift away from relatively expensive TV advertising to online advertising and marketing. The percent of marketing budgets spent online increased to 59 percent in Q2 from 49 percent in Q1.

Online retailers are also spending less of their marketing budgets on pure brand awareness and are now focusing more on customer retention. The survey indicated this strategy may be paying off, as almost half of their revenues in Q2 came from repeat buyers, up significantly from 1999.

“Our research shows that there has been an increased focus on customer retention by online retailers in the first six months of this year,” said Kate Delhagen, chairman of Shop.org’s Committee on Internet Shopping Research. “The average online retailer requires three purchases to break even on the acquisition cost of each new customer. 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.”


Online Retail Customer
Acquisition Costs
Q2 2000 $40
Q1 2000 $45
Q4 1999 $71
Q3 1999 $35
Source: Shop.org/BCG

The survey also found that order conversion rates (the number of orders received divided by the total number of visits) have improved slightly in Q2 (1.9 percent) compared to 1999 (1.8 percent). Returns as a percent of revenue dropped to 5.7 percent in Q2, down from 7.6 percent in Q1, and in line with the 5.6 percent observed in 1999.

Other signs that profitability has shown up on online retailers’ radar include:

  • 86 percent of survey participants have specifically addressed the issue of profitability.
  • Although 40 percent re-negotiated or cancelled their portal deals, online advertising actually increased to 59 percent of total marketing spending, meaning retailer likely re-directed their efforts toward more targeted approaches.
  • 29 percent indicated they had deferred site upgrades, a short-term costs saving that may have long-term consequences.
  • Only 11 percent of respondents have exercised layoffs an an option to move toward profitability.

But are online retailers who are chasing profitability just a high-tech version of the puppy that chases its own tail? Giga Information Group found that the real business-to-consumer (B2C) opportunity lies in multi-channel retailing. According to Giga, companies with a real-world presence that built Internet sales channels accounted for 33 percent B2C sales in 1999. By 2002, Giga expects multi-channel retailers to dominate B2C sales with two-thirds of the market ($92 billion).

This doesn’t mean dot-coms merchants will die out. Giga also found that pure-play Internet retailers will capture $39 billion in revenues in 2002, and $49 billion in 2004.

Nor does this mean multi-channel retailers have it all figured out. Research by Jupiter Communications found that multi-channel shoppers appear to purchase more than single-channel shoppers, yet 76 percent of multi-channel retailers remain unable to track customers’ behavior across those channels.

“As customers increase their use of the Internet channel, retailers must understand that multi-channel buyers form a valuable segment,” said Michele Rosenshein, an analyst with Jupiter and the author of Jupiter’s “Multichannel Retailing Report.” “Failure to anticipate their customers’ needs and create a cohesive experience across all channels will waste not only marketing dollars, but also alienate the company’s best customers. Retailers must leverage the strengths of each channel to serve a given customer.”

Jupiter found that US online consumers will spend in excess of $632 billion in offline channels as a direct result of research that they conduct on the Web, an amount that dwarfs that of the $199 billion that consumers will spend on the Internet. A Jupiter Consumer Survey also found that 68 percent of online shoppers said they use the Web not only to make purchases, but also to research offline purchases, and 54 percent select products in a store and later purchase them online.

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