In “The State of Online Retailing 4.0,” The Boston Consulting Group and shop.org identified that the only online retailers that are already profitable are catalog-based companies. Despite the growth of e-commerce, many multimillion-dollar bricks-and-clicks businesses are still not profitable. This does not mean such companies should stop searching for profits online; it simply means you take a more holistic approach to the online business's contributions to the total corporation.
The past few years have been a wild ride for online and offline retailers. In 1998, there was a huge online influx of bricks-and-mortar retailers, most that wanted their online business to be a completely separate division. Then in 2000 there was the demise of so many dot-coms. This year there is a trend toward integration of online and offline businesses to leverage resources and maximize value. In these turbulent times, here are a few points to keep in mind:
· Online businesses are not as profitable as they appeared initially, except for catalogers that already had the necessary fulfillment and customer service infrastructure.
· Since capital dollars are scarce and the e-commerce opportunity is still shaking out, retailers need to invest based on where their businesses will be next year, not five years from now.
· Smart retailers will identify the appropriate areas of success for their online businesses and structure their resources accordingly. While sales and profits are paramount, they need to broaden their views to understand the online business's true contribution to the total picture.
Success is measured in sales and profits. The problem for bricks-and-clicks retailers, however, is that online sales, while robust, are not growing at predicted rates and profits remain elusive.
Federated Department Stores (parent of Macy's, Bloomingdales and others) projects that its direct business will be $250 million this year but will not be profitable until 2003. What's wrong with this picture? In a soft retail environment, with millions of dollars spent already, retailers need to start identifying additional measures besides sales and profits if they are going to see the long-term value of a multichannel business. Among the valid currencies used by retailers today are:
Loyalty participation and credit card profits. Store credit cards are profit centers for most retailers, therefore anything that makes customers use the store card more often is a big win. Online businesses have enabled stores to better their loyalty programs and increase their inhouse credit card use. Neiman Marcus, for example, has a terrific loyalty program, called InCircle, wherein participants can gain points from online and offline purchases made with the Neiman Marcus credit card.
“The online business gives us a terrific opportunity to spur sales using our Neiman Marcus credit card,” said Michael Crotty, vice president of marketing at Neiman Marcus Online. “E-mail provides an efficient way to tell our customers that they are close to the next InCircle award level, then they can easily go online and buy. Traditionally, it was never cost-effective to regularly communicate this type of message via direct mail. Response rates would be low because they might not be able to get to a store in time. Our online business changes that.”
Cost savings. In certain arenas, online sales save money over other channels. Take, for example, the online travel industry. Since many online sales eliminate agents' fees, a flight or hotel reservation booked online can save $5 to $50. The catalog companies also have found online savings because it is less expensive to accept an order online than through a toll-free number. Retailers need to continue to look at their supply chain and infrastructure to see where cost savings may lie.
Registered users. Cosmetic brands such as Clinique think that getting permission to talk to customers is as important as making a sale online. A simple online quiz, for example, gives women valuable information about their skin, then recommends Clinique products appropriate for their skin types.
Skin-typing is the primary benefit of registering at clinique.com. Since its launch in 1996, Clinique has gained more than 1.2 million registered users and now can use e-mail marketing to drive sales online and offline.
Those thousands of responses retailers now receive from their “feedback” or “contact us” links are great sources of information that can help build their businesses online and offline. In tough economic times, retailers must use their marketing dollars smarter — that means gaining more insight into customers to be able to better target the most likely prospects and create relevant, engaging offers.
Driving sales offline. Another shop.org multichannel study found that 34 percent of people shopping in stores first researched the product online. That's huge. Jupiter Media Metrix estimates that every dollar spent online generates $5 of offline spending. The trick, of course, is measuring this. In the absence of a multimillion-dollar customer relationship management and data warehouse system, try doing something a little “down and dirty.” Approach customers with an offer that is valid online or in-store. Then do a follow-up survey and measure results. While it is not perfect, you may gain insight into how you are driving sales in-store.
Once you identify your own measures for success, align your resources appropriately. If the measure is credit card usage, track usage for online versus offline customers and measure annual spending before and after the Web site launch. If your measure is research, set up benchmarks to communication throughout the different divisions to “spread the word” and encourage new initiatives based on the data.
One final note about spending. I have watched literally dozens of e-retailers waste away because they invested based on where they hoped the business would be in five years rather than on where they knew the business would be next year. While it is important to have scalable systems, remember that you will always spend money on technology and operational improvements, so do not spend everything today. While it is a hassle to rebuild systems or change fulfillment centers, at least you will stay in business long enough to do it.