Online merchants have gotten a lot of mixed messages lately. First came the dire forecasts from Forrester Research in “The Demise of Dot-Com Retailers.” It carried predictions for online merchants as gloomy as the title suggested. With the tech-heavy Nasdaq in a downward spiral, traditional press gleefully jumped on the bandwagon to proclaim the end of a revolution in online merchandising.
The following week, the Internet Advertising Bureau and PricewaterhouseCoopers announced that Internet ad spending in 1999 had reached $4.62 billion, up 141 percent from 1998’s $1.92 billion. And Pete Petrusky, director of the new-media group at PricewaterhouseCoopers, expressed optimism that spending by e-tailers would continue to surge in 2000.
So how is it that online ad spending will soar under a cloud of analyst predictions of bankruptcies and consolidations?
While overall spending will increase, this growth is likely to be spurred by a smaller, more select group of successful online merchants. The merchants who emerge will be recognized by their interactive marketing techniques and masterful use of emerging Internet marketing technologies. Analysts will identify a consistent thread at many of these enviable firms: the use of e-marketing intelligence to improve marketing by lowering customer acquisition costs and increasing lifetime revenue for repeat buyers.
A recent McKinsey & Co. study of e-commerce companies found that while online merchants are attracting visitors in ever-increasing numbers, they are spending more on customer acquisition than they’re likely to make in profit from a typical customer. Sites are driving traffic and getting incrementally better at turning a transaction, but they have a hard time persuading first-time buyers to return. With the high costs of acquiring a new online customer, repeat buyers are key to profitability.
Poor browser-to-buyer conversion ratios are part of the problem. On average, fewer than 5 percent of e-commerce site visitors make a purchase. As a result, companies spend an average of $250 on marketing and advertising for every new customer they acquire. The gross income from a typical customer (after operating costs are deducted from the money the customer spent) is $24.50 in the first quarter and $52.50 for each quarter thereafter. But two-thirds of new customers don’t make another purchase, so the typical e-commerce firm actually loses money on the average customer. Not the ideal scenario.
All of this points to customer retention as the key for e-commerce firms hoping to turn a profit. A 10 percent increase in repeat customers would mean a 9.5 percent increase in the corporate coffers, according to McKinsey’s calculations.
Lower Acquisition Costs, Increase Revenue
E-commerce firms will have to be creative if they want to increase retention and maintain momentum toward positive cash flow. At the heart of this creativity is the test-and-measure discipline of advertising and direct response marketing.
In the past five years, legions of brand managers, media buyers and direct mail professionals have labored to map their skill sets to the online medium and practice the crafts they mastered in offline environments. But until recently, efforts to improve their interactive marketing programs have been hamstrung by the scarcity of technology needed to provide accurate, granular reporting on campaign performance.
The problem lies in the reporting tools that have been available. In the past, you had to build a complex data mart and rely on your technical staff to develop the reports needed. However, a recent spate of innovative service offerings put some truly powerful tools at the disposal of online marketers.
These services are completely outsourced and require weeks, rather than months or years, to get up and running. Marketers who best employ these technologies stand a strong chance of outdistancing their competitors.
Perhaps most interesting among these tools are online audience reporting and analysis services that track visitor browsing and buying behavior and correlate user activity with the banner, search engine or affiliate partner that delivered each unique visitor to your site. For the first time since the inception of the Web, marketers now have affordable reporting sources that deliver closed-loop tracking of their visitors. And these reporting tools continue tracking first-time visitors and buyers during subsequent visits to the site.
Direct response marketers will recognize immediately the value of such reports. Ongoing tracking of site visitors allows merchants who employ it to measure campaign performance beyond the duration of the campaign itself. Marketers can see which banners, e-mail campaigns, affiliates and search engine terms deliver high-value visitors and repeat buyers.
Imagine negotiating your banner buys and affiliate deals armed with accurate revenue metrics that show how each and every lead generation source performed relative to one another. From now on, these reporting sources will enable smart online marketers to focus their campaigns and affiliate efforts on sites that deliver high-quality leads.
The granular click-stream reporting now available also allows marketers to reduce acquisition costs and drive conversion by understanding which products drive first-time buyers. For example, if the marketer notices that many people are buying a certain product as their first purchase, the marketer may want to put that product on special, advertise it in banner ads or add it to the home page.
New reporting tools also provide “click from/click to” reports that can help drive acquisition and retention. For example, a marketer could use these reports to find out where a site acquired five-time repeat buyers, which products those customers frequently purchase, and what content they frequently browse. The marketer also could see how individuals navigated through a store before buying a product and could make those store paths more accessible to all visitors by redesigning the site.
Even third-party interactive media development firms hired by aggressive e-tailers to drive marketing initiatives will benefit from this new generation of intelligence.
Digitaria, San Diego, drives return visits and repeat buying for its clients by creating intuitive, customizable and interactive community content. By discriminating between unique visitors and buyers, firms such as Digitaria can overcome the passive interaction of community sites by enabling past behavior of the end user to be profiled.
Therefore, a company can present targeted products and services that have a higher likelihood of being purchased. Their ability to analyze the effectiveness of this content for client Web sites such as those for Petco and Spa.com will ensure success for both e-tailer and marketing firm alike.
By understanding the lead sources and on-site content that drives commerce, marketers can improve acquisition and retention. The effective use of these affordable and readily accessible tools will certainly influence which merchants are left standing at the end of the coming shake out in online retailing. This race will most definitely go the swiftest; so don’t hesitate to start taking advantage of these new reporting services. Your competitors certainly will.