Study: Acquisition Costs Drop in 3Q

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Under pressure from bruised financial markets, online retailers halved average customer acquisition costs this third quarter vs. the second quarter, according to a study released Wednesday by The Boston Consulting Group and the trade association shop.org.


The costs of acquiring a new customer fell from $40 in the second quarter to $20 in the third quarter. In comparison, it still costs catalogers an average of $38 to snag a new customer.


"The main reason is more efficient marketing spending," said James Vogtle, Toronto-based director of e-commerce research at BCG. "The spending has shifted from broad, mass-marketed media such as television and radio to more targeted e-mail campaigns, more targeted online advertising campaigns on specific sites."


Traditional media are being eschewed in favor of online marketing, the survey showed. In the third quarter, online retailers spent 64 percent of their marketing budgets on online media, up from 59 percent in the second quarter.


"What that has allowed online retailers to do is to bring them closer to their audience so that they can direct their marketing dollars against customers that are more likely to purchase from them," Vogtle said.


Still, there are differences between the media habits of Internet-only retailers and multichannel players. Only 26 percent of the Internet-only retailers surveyed said they would increase their offline marketing spending, compared with 42 percent of the multichannel players.


Focus and discipline seemingly were the undertones of all marketing in the third quarter, based on responses from 94 North American online retailers interviewed by BCG for shop.org, an online retail trade body in New York. This data will be incorporated into a comprehensive 2000 study due out in April.


"People are spending their marketing budgets on more focused acquisition and retention campaigns rather than general brand awareness," Vogtle said.


Spending on brand awareness efforts dropped to 14 percent of marketing budgets in the second quarter, from 20 percent in the prior quarter.


The sudden drop in customer acquisition costs did raise eyebrows, however.


"One of the first questions that we had when we saw this number was, 'Are online retailers still growing in terms of the number of customers that they're acquiring?' " Vogtle said. "And the answer to that is, well, yes."


In fact, online retailers that were part of BCG/shop.org's second- and third-quarter surveys witnessed a 28 percent increase in new customers. This growth occurred despite a 34 percent drop in spending on customer acquisition.


Vogtle said the online customer acquisition costs are as low as they can get, at least for now.


"I'm not sure it'll go much lower than that. [Online retailers] have quite a low customer acquisition cost at $20," he said. "We'll see if online retailers are able to maintain this over the long run. But it's a very positive result heading into the holiday season."


Holiday preparations indeed are in full swing.


A recent study by BCG and Harris Interactive found that holiday shoppers intend to increase their online spending from $170 in 1999 to $240 this year.


In view of this potential jump in Internet shopping, retailers are scrambling to boost their customer acquisition and retention efforts. Making the shopping experience easier and reliable was a paramount concern of every makeover.


According to the new BCG/shop.org study, 70 percent of the surveyed retailers have redesigned their sites to improve navigation and have added holiday-specific departments such as gift centers. Sixty-five percent of the surveyed retailers said they have increased their customer service capacity.


Sixty-two percent of the retailers said they would use online marketing to draw traffic to the Web stores. Some of the tactics used include gift certificates, new or revised portal deals for prominent placement, partnership deals with content sites, free gifts with purchases and free shipping, with or without strings attached.
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