A recent survey conducted jointly by shop.org and the Boston consulting group (The state of online retailing - second quarter 2001 update) just analysed the strategic decisions made by online retailing web sites in the management of marketing budgets.

This survey was carried out in the second quarter of 2001 and was based on reports from 74 American retailers, not only Internet pure-players but also multi-channel retailers.

One of the interests of this survey lies in the analysis of the different strategies that are used by web sites to face up to the difficulties they are presently ongoing.

If some of them refuse to come to terms with the problem and use strategies such as: "let's put an end to our activities", crisis periods do hold an interest as they force the actors involved in the markets to deal with their own resources in the best possible way, according to their past experiences.

Needless to say, customer acquisition costs are the first indicator of the reduction in marketing expenses.

According to this survey, customer acquisition costs have gone down 65% from a year ago, compared to the second quarter of 2000, as the chart shown below indicates.

These figures also indicate that this "drop" started a long time ago; we just have to think that it was as much as $71 in the fourth quarter of 1999.

But this "raw data" should be read with caution, as we'll soon find out. Indeed, if some "cuts" which are made in marketing expenses have an immediate effect on this type of calculations, their long-term effect can unfortunately contradict results that might seem rather good at first sight.

What this survey clearly indicates is the fact that marketing expenditure needs a new balance between online and offline media. This is why, over a nine-month period, the ratio of online media expenses would have gone from 55 to 71%!

It goes without saying that we still need to wait a few more months before we know for sure whether or not this tendency will be confirmed, but this reversal of strategic choice to the benefit of online media does prove striking.

On the contrary, the drop in the use of offline media by retailers is far from being consistent between the different media that are used.

Thus we notice a sudden rise in offline marketing expenses dedicated to the sending out of paper catalogues, as it increased by over 60% between 2000 and the second quarter of 2001.

On the contrary, televised advertising campaigns, which used to account for as much as 7% of all marketing expenses in the retail sector in 2000, now only account for 1% of the budgets. The same thing applies to direct mail, as it went down from 7 to 1% in the first quarter!

The chart below clearly shows the evolution of the biggest expenses that were made in offline media between the first and the second quarter of 2001:

As far as online marketing spending is concerned, the two main beneficiaries are emailing and affiliate programs.

This is how emailing became one of the most important online retailing medium, as it accounted for as much as 21% of the whole marketing expenditure in the second quarter of 2001 (compared with 13% in 2000).

It also proves interesting to notice that such an increase in the expenses dedicated to emailing corresponds to the correlative increase of print expenses and the sending out of paper catalogues.

When we put both these sets of expenses together (on and offline), we notice that emailing and catalogues that used to account for 21% of marketing expenditure in 2000, now account for as much as 34% of all marketing expenses in the second quarter of 2001, which represents an increase of 62%!

This clearly illustrates the revival of direct marketing, in all its forms, in comparison with a mass marketing media (hence TV advertising budgets went from 7 to less than 1%…).

However we should still remain cautious. Emailing, even when targeted, is a marketing tool that can prove counter-productive in the long term. Indeed, as soon as the average consumer reaches the psychological saturation point of receiving commercial emails (and this point could soon be reached), emailing will then have to be handled very cautiously.

Retailers will then have to find some other way to communicate which might prove much more expensive than emailing…

But these new strategic marketing choices that were made by retailers also benefited affiliate programs which increased from an average of 6% of the expenses in 2000 to 14% in the second quarter of 2001.

The table below shows the evolution of these different online expenses between the first and second quarter of 2001:

Searching for the maximum efficiency in the marketing expenses field has had a positive impact: 94% of retailers that responded the survey reached profitability in the last six months.

Said profitability was reached through many strategic decisions, sharp or…brutal.

The main actions that were carried out concerned the reduction of marketing budgets (if 40% of retailers were already involved in this type of action a year ago, then it is now as much as 56% to follow the lead). This action also concerned the renegotiation of their portal deals.

Therefore 46% of respondents said that they already renegotiated their portal deals, while 23% purely and simply cancelled them… this explains the difficulties that portals, such as Yahoo! are presently ongoing.

Another element proves interesting: if the reduction of costs proved to be one of the most efficient tools that is used to reach profitability, another method can also be used, which contradicts everything that has been seen on the Web until now (the free era), and it concerns the policies of price setting used by these distributors.

33% of retailers have increased their selling prices from last year and please bear in mind the fact that 23% declared that they have reduced or even cancelled promotional and discounted offers on their web sites.

This type of attitude proves that the market is becoming increasingly mature and that its consumers, who prove more and more customized, no longer surf to find out the best price but slowly integrate the Internet channel in their consuming habits. This allows retailers to raise their prices to a more "normal" level, or at least one more in accordance with their expectations if they want to reach profitability.

Retailers also use another method to reduce expenses: they no longer renew their web sites. New site versions are generally postponed to a later date.

But these decisions of not renewing the different versions of the sites might have consequences for long-term consumers, especially the non-optimisation of the quality of their online experiences' on "ageing" web sites.

This allows us to better understand the impact that these decisions might have on agencies and service providers whose turnover finds itself greatly reduced not only because web sites are presently adopting renewal cycles that prove way longer than they used to, but also because of the number of bankruptcies that were filed in, not to mention the projects that were cancelled or postponed…

And yet, one of the key elements to profitability is based on customisation of visitors, and even though 50% of online retailers have decided to spend more money in programs to try to "retain" existing customers, long-term customisation requires a constant improvement of sites themselves.

The chart below illustrates the evolution (over a year) of the main strategic decisions retailers adopted to cut down costs:

In conclusion, we can see that these drastic management uses of marketing expenditure greatly influenced online conversion rates of visitors to clients on retail web sites.

The conversion rate of visitors to clients went down from 2.6% in the fourth quarter of 2000 to 2.3% in the first quarter of 2001 and to 2.2% in the second quarter of 2001. Despite the fact that these conversion rates remain higher than what they were a year ago, they still fall rather sharply and this should advise web sites not to go too far…

Sources : Shop.org - Boston Consulting Group