Online retailers making slow and steady climb toward profitability

[September 4th 2000]

Online retailers have marginally improved their performance while taking concrete steps to increase overall profitability, according to a recent Shop.org/The Boston Consulting Group survey of online retailers. Customer acquisition costs have decreased and order conversion rates have risen.

"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."

These findings, based on survey responses from 66 North American online retailers, show that customer acquisition costs continue to decline from a high of $71 during Q4 1999, to $45 in Q1 2000, to $40 in Q2. This is due, in part to a shift away from relatively expensive television advertising to online advertising and marketing. While this is a significant decline, overall customer acquisition costs remain higher than in Q3 1999 ($35).

As well, online retailers are spending less of their marketing budgets on pure brand awareness and are now focusing more on customer retention. This strategy is beginning to pay 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."

Other findings from the survey include:

• Order conversion rates have improved slightly in Q2 (1.9 percent) compared to 1999 (1.8 percent).

• The percent of marketing budgets spent online increased sharply to 59% in Q2 from 49% in Q1.

• Returns as a percent of revenue dropped to 5.7% in Q2, down from 7.6% in Q1, and in line with the 5.6% observed in 1999.

Beyond these incremental improvements in performance, online retailers also appear to be taking significant steps to improve profitability:

• 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 spend. Retailers likely re-directed their spending towards more targeted approaches.

• 29 percent indicated that they had deferred site upgrades. While this represents a short-term cost saving tactic, retailers could experience longer-term consequences in the form of decreased customer satisfaction with the online shopping experience.

• In contrast to the recent media emphasis on dot-com layoffs, only 11 percent of survey participants have exercised this option as a way to improve profitability.

Links
Shop.org		http://www.shop.org
The Boston Consulting Group		http://www.bcg.com