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Online Promotions to Mature, Spending to Soar by 2005

Spending for online promotions will skyrocket to $14 billion by 2005, according to Forrester Research Inc., Cambridge, MA.

This year, spending will reach $1.8 billion as the typical marketer pays an average of $313,000 for online promotions — defined as sweepstakes, coupons, samples, free shipping and rewards.

While this dollar amount will rise significantly, marketers won't be spending frivolously, according to the survey of 15 dot-com retailers, 15 multi-channel retailers and 15 manufacturers. Executives from marketing companies, such as 24/7 Media, Netcentives and IQ.com, were also interviewed.

Marketers will shy away from one-size-fits-all promotions in favor of targeted, layered programs that alter consumer behavior at key points in the buying cycle.

Future promotions will address the power of one-to-one marketing on the Internet, according to Charlene Li, senior analyst for Forrester Research. Presently, they fail to do so.

“The promotions out there right now don't take advantage of the fact that people have different levels of sensitivity to incentives. One consumer may respond to a 50-cent coupon instead of a 60-cent coupon. They don't address whether a customer has been to the site before, bought before or has bought multiple times and is a loyal customer.”

Some marketers have begun to realize that promotions are “more powerful if they are tweaked at different points in the decision-making cycle,” said Li. “People are starting to do it through e-mail.”

Indeed, e-mail was the most popular method of delivering promotions according to 83 percent of the respondents. Seventy-one percent said they deliver their promotions on site. Direct mail placed third at 52 percent. Rich media banners and television tied for last place at 14 percent.

The most effective type of promotion was a free gift or gift with purchase according to 31 percent of the marketers surveyed. Also rated highly were sweepstakes, 20 percent; free shipping, 16 percent; coupons, 11 percent; and price discounts, 11 percent. Referrals and private-label points programs were given a zero percent rating.

The most common promotional tools were price discounts and coupons, which were used by 64 percent of the respondents. Free merchandise followed closely at 60 percent, and sweepstakes were used by 53 percent of the respondents. Rebates scored poorly at 7 percent.

Marketers have identified targeting as the most important element for an online promotion. On a scale of one to five, with five being extremely important, targeting received a 4.3. Placement and the amount of the offer received a 4.1 percent rating by marketers. Creative received a 3.8 percent rating.

While marketers have identified the significance of targeting, they are making it more difficult on themselves as many are failing to track the results of their promotions. Thirty-eight percent of the companies didn't know their overall customer acquisition cost.

It's not the marketer's fault as promotions are often overlooked by decision makers, said Li. “It's really early on in the industry. Promotions are always taking a back seat to advertising and direct mail. Right now, the promotions field is filled with a lot of confusion. When it gets more sophisticated, marketers will use more powerful promotions to really influence consumer behavior in a finely tuned way.”

As the industry matures, marketers will also place greater emphasis on customer retention rather than just spending heavily on acquisition. Today, only 15 percent of promotions budgets is spent on retention. By 2005, that number should increase to 35 percent.

The amounts spent on these promotions will fluctuate in the coming years. Dot-com retailers will make cuts to their promotional budgets; however, multichannel retailers — those that use online and offline sales channels — and manufacturers will triple their online promotion spending by 2005.

Dot-com retailers will spend 24 percent of their $1.4 million budgets on online promotions this year. This should shrink to 15 percent of their $2 million budgets by 2005. Multichannel resellers will spend 40 percent of their $1.3 million budgets on online promotions this year and 30 percent of their $4 million budgets in 2005. Manufacturers will spend 40 percent of their $750,000 marketing budgets for online promotions and 50 percent of their $3 million marketing budgets in 2005.

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