Study: Net Retailers Cutting Ad Budgets to Survive

A new survey of 66 North American online retailers released today by the Shop.org trade association and a consulting firm indicates that 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 Silver Spring, Md.-based Shop.org and The Boston Consulting Group Inc., 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, chairwoman 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% 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% in this year's first quarter to 59% 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 $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 last year.

The survey findings reinforce comments made earlier in the month by online retailers and analysts who noted that financial concerns were forcing many online retailers to look for more creative and cost-effective ways to target shoppers during the upcoming holiday season. For example, FTD.com Inc. CEO Michael Soenen said his company expects to spend $17 million to $20 million this year on advertising, down from $42.9 million last year, with the bulk of the cuts coming from television and print ads.

Julian Chu, an analyst at Mainspring Communications Inc. in Cambridge, Mass., agreed that reducing customer-acquisition costs is a crucial step toward increasing profits for online retailers. Last year, Chu said, many companies blindly spent too much money on untargeted advertising in hopes of attracting more shoppers to their Web sites.

"The idea that any customer is a good customer is misguided," Chu said. "Companies can't make money on a customer who shops once or twice on their site." The big challenge for online retailers, he added, is figuring out how to entice and keep repeat customers and then targeting advertising dollars accordingly.

One way to keep customers coming back for more is for a company to deliver what its Web site promises in terms of shipping the products customers have ordered, Chu noted. As a result, investing in order fulfillment and customer service capabilities is of paramount importance, he said.

The Shop.org survey found that 86% of the online retailers that responded have taken specific steps to address the issue of profitability. Nearly 30% 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% 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 conducted by Shop.org and The Boston Consulting Group. Earlier this year, the two organizations released the third installment of a wider and more comprehensive annual study in which 38% of the 221 online retailers surveyed claimed that they were operationally profitable

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