Online retailers cut ad budgets to trim losses

A new survey of 66 North American online retailers released this week by the Shop.org trade association and a consulting firm indicates e-commerce companies are taking steps to cut down on their advertising costs and to fine-tune their marketing strategies as part of an increased focus on becoming profitable.

According to the survey conducted by San Jose-based Shop.org and Boston Consulting Group, online retailers spent less money on building up consumer awareness of their Web sites and more on retaining customers during this year's second quarter than they had previously. Almost half of the second-quarter revenues reported by survey respondents came from repeat buyers, up "significantly" from last year, Shop.org said.

"The average online retailer requires three purchases to break even on the acquisition cost of each new customer," Kate Delhagen, chairman of Shop.org's Committee on Internet Shopping Research, said in a statement. And given the high cost of finding customers, many companies are now "focusing their efforts on increasing the frequency of purchases from existing customers" in an attempt to become profitable more quickly, she added.

The survey also found that online retailers are shifting their advertising away from television campaigns to less expensive online marketing venues. For example, 28 per cent of the surveyed companies reduced or canceled television advertising, according to Shop.org. And the average percentage of marketing budgets spent online increased from 49 per cent in this year's first quarter to 59 per cent in the second quarter.

Shop.org said the shift toward online advertising and marketing helped reduce the average cost of finding a new customer to US$40 in the second quarter, down from a high of $71 during the fourth quarter of last year. But the customer acquisition cost is still higher than the $35 average the trade association found earlier in 1999.

In addition, the survey found that 86 per cent of the online retailers that responded have taken specific steps to address the issue of profitability. Nearly 30 per cent said they had even deferred upgrades of their Web sites -- a cost-saving tactic that Shop.org warned could cause "longer-term consequences in the form of decreased customer satisfaction." On the other hand, only 11 per cent of the companies said they had resorted to layoffs.

James Vogtle, director of e-commerce research at The Boston Consulting Group, said online retailers are improving their performance on key business metrics such as acquiring customers and maintaining their loyalty. But, he warned, companies "will need to continue with this disciplined approach in order to reach profitability."

The second-quarter survey was part of an ongoing research program being done by Shop.org and The Boston Consulting Group. Earlier this year, the two organisations released the third installment of a wider and more comprehensive annual study in which 38 per cent of the 221 online retailers surveyed claimed that they were operationally profitable.

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