Financial Pressures Ground Bluefly's Acquisition Spending

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Pressure to perform from financial markets has caused Internet off-price retailer Bluefly Inc. to slash customer acquisition costs by 70 percent this quarter vs. the same period last year.


The company, which sells designer apparel and home furnishings for heavy discounts at www.bluefly.com, spent $73.21 to acquire each new customer in the second quarter, compared with $239.46 in the second quarter last year and $103.89 in the first quarter this year.


"The financial markets have been challenging, but to a certain extent they've been irrational for the last two years," said Ken Seiff, CEO of Bluefly. "They voted every [online] retailer to be a billion-dollar success story last year and the year before, and now they're equally irrational in the opposite direction, assuming that every retailer's not going to make it."


Bluefly has $3.9 million left in cash and $6 million in commitments from financier George Soros -- just enough to last through year-end.


As a result, Seiff and his team at the 2-year-old retailer have examined ways to trim costs.


"We just completed a study to analyze where our specific customer segments come from and what it was costing to acquire that traffic from our different resources, whether it's word of mouth, e-mail programs, online portal deals or magazine deals," Seiff said.


Portal deals have been re-evaluated, though Seiff refused to name sites dropped from the media plan. Bluefly will continue strategic alliances with AOL, Excite, Yahoo, Netcenter, MSN and Women.com.


Meanwhile, print will account for less of Bluefly's marketing budget.


In the earlier mix, the ratio of marketing dollars spent on print advertising to online was 60-to-40. Now it will be an estimated 40-to-60. Bluefly's second-quarter spending on print and online advertising was $2.6 million. The online effort includes banners, keyword searches, and permanent positions in shopping malls.


"One of the things we're finding is that customer acquisition costs through print [are] much higher than through online media," Seiff said. "So, while our print budget will go up, as a percentage of our total budget it's diminishing."


E-mail marketing is another area of focus. In the second quarter last year, Bluefly did not have a significant e-mail list due to insufficient investment. Realizing the lost opportunity, the retailer reached out to registered users through e-mail offers in fourth quarter 1999.


"I think something like about 10 percent of our business in the second quarter was generated as a result of our e-mails, which didn't exist until last year," Seiff said.


Research also showed that word of mouth from satisfied customers played a key role in driving traffic and turning those visitors into buyers. Consequently, the site will soon debut a new "Recommend to a Friend" feature.


In the second quarter, Bluefly had 638,269 registered users -- including 123,574 customers -- up from 85,370 users in the same quarter last year. Net sales this past quarter were $4.3 million, up 480 percent from $741,000 for the same three months ending June 30 last year. Net losses for the quarter were $5.5 million, up from $2.98 million in second quarter 1999.


Positive developments included an increase in the average order size per new customer to $88.68, up from $80.12 in second quarter 1999. Revenue per unique visitor was up 430 percent to $4.92, from 93 cents in the same quarter last year.


Seiff anticipates that the lifetime value of a Bluefly customer is about $150 for six purchases over three years.


"That includes a 20 percent discount and assumes that we'll get to about a $40 acquisition cost over time and that we'll get to a 40 percent gross margin," Seiff said. "Of course, those are forward-looking statements. There's also the likelihood that we won't get there."
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