Study: Cut Operations, Not Marketing CostsDot-coms seeking to become profitable should focus on cutting operating costs instead of sales and marketing costs, according to a study released last week by Getzler & Co. Inc., a New York-based firm specializing in turnarounds and corporate restructuring.
The study, which included 190 tech companies, compared the second- and third-quarter performance of 46 firms that cut marketing costs with 25 firms that cut operations costs.
"While sales growth among the two groups remained approximately the same, there was a dramatic difference in profitability," said Brian Mittman, vice president at Getzler & Co. From the second to the third quarter, losses remained constant at firms that cut operations costs, but losses more than doubled at firms that cut marketing costs.
"These results indicate that marketing costs remain a far greater driver of profitability for dot-coms than operations costs," Mittman said.
Operations costs included general and administrative expenses; overhead; and the costs of technology, product and content development for Web sites.
Roughly 40 percent of the tech firms in the study underwent restructuring during the third quarter, compared with only 27 percent during the second quarter. During the third quarter the industry maintained healthy revenue growth, at more than 50 percent annually, while making some progress in reducing operating losses.
However, the study's results were not all positive, according to the company.
"The bottom line is that virtually all dot-coms are still losing money," Mittman said. "The ratio of their losses to sales remains high, and though losses are narrowing, it's not happening fast enough."
Of the 190 firms in the study, only three were profitable on a cash basis. The average firm lost $13.4 million on $22 million in sales during the second quarter, compared with losses of $12.8 million on $25 million in sales during the third quarter.
"At that rate of improvement, in the current market environment, most firms won't be around long enough to become profitable," Mittman said.
The study further identified three groups of firms according to their long-term prospects: those with little chance of becoming profitable, those that could become profitable but with severely reduced growth rates, and those that could become profitable and continue growing.
Companies such as Priceline.com or Buy.com, for example, are relatively close to profitability but saw their sales decline in the third quarter. More likely success stories, according to Mittman, are firms such as financial information provider Multex.com, online real estate broker Homestore.com and business-to-business community operator Vertical Net. Each firm had losses of less than 9 percent of revenue, reduced their losses during the third quarter and increased their quarterly revenue by at least 20 percent.