E-Retailers Pull Back on TV Ads

SAN FRANCISCO (08/31/2000) - In the never-ending push toward profitability, 86 percent of Web retailers took steps to cut costs during the second quarter, including 28 percent that curbed spending on costly TV ads, according to a new study.

Shop.org and the Boston Consulting Group surveyed 66 pure-play and multichannel e-commerce merchants and found that on average during the second quarter, it cost about $40 to attract a new customer. That figure is down significantly from the $71 per-customer acquisition cost in the fourth quarter of 1999, and down from $45 in the first quarter of 2000.

Analysts predict that the 28 percent of sites that scaled back or dropped their TV ads will continue through the third quarter but that it could reverse course as e-retailers ramp up for the holiday season.

The reduced marketing expenditures were due in part to online retailers shifting their advertising expenses from offline advertising to online ads, according to James Vogtle, director of e-commerce research for the Boston Consulting Group. The portion of marketing budgets spent online increased to 59 percent in the second quarter, up from 49 percent in the first quarter.

Perpetuating a trend seen in 2000 that points to continued advantages for brick-and-clicks over pure-plays, spending that is devoted to the online channel remains fairly low for a multichannel retail business, for which adding a URL to an ad is affordable.

Order-conversion rates inched up from 1.5 percent during the first quarter to 1.9 percent in the second. During the quarter, the average order size was relatively unchanged.

The survey found that some e-retailers, such as those selling computer hardware and software, are breaking even on marketing expenses after a purchaser's first visit. Following that, the consumer electronics and food and beverages categories are the closest to profitability among the e-commerce lot.

Overall marketing budgets focused on customer retention grew to 19 percent in the second quarter, up from 14 percent during the first quarter. Online retailers also experienced improved loyalty rates and a higher percentage of revenues generated from repeat customers during the quarter, when 45 percent of purchases stemmed from repeat business. That figure was up from 41 percent in the first quarter.

The rate at which products bought online were returned, which spiked to 7.6 percent in the first quarter, declined to 5.7 percent for the second quarter. That figure was more in line with the 5.6 percent recorded for 1999.

In addition to curbing TV ad spending, 29 percent of online retailers deferred site upgrades, as they sharpened their focus on profitability. Forty percent controlled costs by reducing or canceling portal deals, and only 11 percent of survey participants used layoffs as a method of controlling costs.

And as online retailers moved to focus on customer retention, one successful tactic was to narrow the target audience and focus on customers who would be more likely to buy from a given retailer in the first place.

"I call it shooting bullets, not buckshot," says Kate Delhagen, chairman of the committee on Internet Shopping Research at Shop.org.

Components of successful marketing strategies designed to get first-time buyers over the fence included more-effective ways of merchandising products, improved tools to help site navigation, quicker e-mail response and making customer-service phone numbers more accessible. Delhagen said such techniques will become more important in attracting repeat customers as the number of new online shoppers plateaus.

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