Wednesday, November 22, 2000
Online Retailers Making Steady Climb to Profitability
Online retailers have marginally improved their performance
while taking concrete steps to increase overall profitability,
according to a recent online retailer Shop/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'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). Note: Order
conversion is derived from the number of orders received
divided by the total number of visits during a specific
time frame.
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.
$50 Billion of Commerce in the U.S. Will Be Wireless
The industry's top analysts and executives gathered in
Santa Clara and New York City to explain when the mobile
Internet will be ready for prime time. According to
research presented by the Yankee Group at its second
annual Mobile.Net: The Wireless Internet Explosion
conferences, held last week in Santa Clara and later
in November in New York City, the mobile Internet and
its supporting technologies are rapidly progressing
----- but are still a work in progress -- with mobile
phone penetration already greatly exceeding PC penetration
on a worldwide basis, and quickly catching up in the
United States.
"Critics say that mobile operators are not up to
it when it comes to data services. They contend that
screens are too small, connections speeds too low, and
keyboards too awkward to match what we have with the
fixed Internet," said Keith Mallinson, Senior Vice
President of Wireless/Mobile Communications, newly appointed
from our European offices, which is leading the world
in mobile Internet and data innovation. "These prophets
of doom are missing the point," stated Mallinson. "Strict
comparisons of the current state of the mobile Internet
to the fixed Internet ignore the uniqueness associated
with mobility; for example, location, personalization,
and voice features. The mobile Internet will evolve to
offer valuable services and applications that utilize
these unique capabilities."
Mobile Internet Convergence
Key findings discussed from the Yankee Group's Mobile
User Survey of 3,000 North American respondents indicate
that Internet-ready mobile devices are rapidly becoming
much more pervasive than PCs with mobile devices like
cell phones being replaced every year or two, and costing
no more than a hundred or so dollars rather than thousands
of dollars. Moreover, a PC Internet connection may
always be on, but only a mobile can always be with
you.
Mobile Internet Market
There is a high correlation between home Internet access
and mobile phone adoption, according to the Survey.
To date, users are indicating interest mostly for regular
fixed network type Internet capabilities such as email,
rather than those capabilities that are uniquely mobility-based.
The Yankee Group Mobile User Survey shows that location-based
services, which have the potential to revolutionize consumer
use of these devices are actually of concern to users,
these include:
56% of respondents somewhat or greatly worried about
the threat of how such information might be used.
64% of respondents are somewhat or greatly worried about
personal profiling on these devices.
But just as caller-ID on our fixed and mobile networks
has been transformed in customer perception from being
a privacy threat to a service enhancement, the Yankee
Group believes that there is enormous potential with
services that harness the full potential of the "unwired" society.
