December 26, 2000, 9:55 AM

Heavy Weather

(Page 2 of 3)

Some e-retailers are looking away from the short-term bump delivered by advertising to long-term promotional partnerships. “They’re going to become critical, and it’s critical that you have the right partner,” Ladd says. But it’s just as easy for companies to overspend for such deals. The recently closed Living.com, for example, had agreed to spend $145 million over five years to be Amazon’s exclusive furniture and home furnishings partner.

With much of the most visible online space concentrated at top sites like AOL and Yahoo, e-retailers have spent big on such opportunities, with no guarantee it will generate sales to justify the costs. Even so, it continues. A new study by PricewaterhouseCoopers says $1.95 billion was spent on web advertising in the first quarter of this year, a 182% jump over spending in Q1 99. Web-based companies buying ads in their own medium accounted for 12% of that spending.

Reports such as that just out by Media Metrix continue to tout online advertising as a traffic-builder. But whether traffic necessarily guarantees sales for e-retailers is another story, and some industry watchers believe it’s time to pull back. “Now is the time to say, am I better off giving $5 million to AOL or $1 million each to smaller sites and seeing what my benefit is from that,” says Mittman.

And it’s not just in the realm of advertising where e-retailers are paying-or overpaying-for partnerships. The struggling PlanetRx.com, an online drugstore, had an agreement with a pharmacy benefits management company that gave the company a 20% stake in PlanetRx as well as an annual payment of $14.6 million. In return, PlanetRx acquired the other company’s online prescription operation and got access to its customers. Was the partnership worth it?

“Giving almost $15 million to one partner when your annual revenues are only $36 million is excessive,” says one analyst. Beset by troubles, PlanetRx recently picked up $50 million in a financing round but remains far from stability by analysts’ reckoning.

Pinch those pennies

The bottom line in such tales is, well, the bottom line. A growing body of thought suggests e-retailers might do better resisting the temptation to win a big partnership if it means paying too much for it. A better bet? “Watching marketing costs very closely and measuring campaigns’ and partnerships’ true cost effectiveness,” says Mittman.

Technology developers have known for years that dislodging what’s established takes a product that’s a significant improvement over what’s available, not just a marginal one. Just look at what happened to 50 years of vinyl with the advent of smaller, more durable CDs. The same rule applies to online shopping, something many e-retailers either ignored or didn’t realize.

“A mistake online retailers made was to assume that all they had to do was mimic what happens in the offline world and apply it online-that added value wasn’t that important,” says Schwartz. “They thought that as long as you did a lot of mass media advertising and had nice prices and offered things like quick shipment, the convenience alone would enable you to survive.”

Pressed for more sales, a number of e-retailers have done what offline stores sometimes do: throw more SKUs at the problem. But the risk there is that already-wobbly web offerings could spread themselves too thin. More.com, for instance, an online drugstore, has added holistic products to a lineup of products that already weren’t racking up big sales, says Dougherty. “If you don’t already sell a certain number of SKUs well, adding more is not going to correct that problem,” she adds “Adding more selection is definitely not a good Band-Aid.”

What’s clear now is that to succeed, online merchants must deliver all the best parts of the offline experience to shoppers-and more. Analysts say one reason sales at Amazon ramped up so quickly is that the site dreamed up and offered unique features to web shoppers that they couldn’t get in a store, such as allowing them to write their own product reviews and recommending to shoppers other books they might like based on their personal profiles. “Catalogs have been around for decades,” points out Schwartz. “If all online shopping offers is the convenience of not having to go to a store, that’s not going to cut it.” Instead, to win, e-retailers must offer features that differentiate them from-and improve on by an order of magnitude-what other shopping environments offer.

A tale of two worlds

Short of scrutinizing partnerships to make sure they pay off and reining in spending, what can e-retailers to do to survive and thrive in the shakeout? Plenty, say the experts. (see “Online and in the Black”, p. 40.) Some companies are upping their chances of success by keeping their focus narrow. Take gift site RedEnvelope.com. “They don’t try to be a Wal-Mart and offer everything to everybody,” says Bartels. “Instead, they focus on finding the types of gifts people with good taste would like to give to their friends.”

Other companies are broadening focus to go after other opportunities. Ubid.com, for example, a consumer auction site, has announced plans to add a separate, dedicated site targeting the lucrative b2b market.

Many e-retailer also are spending on new technologies such as personalization tools to drive more sales from traffic already coming to their sites rather than pouring more money into increasing traffic. And when technology vendors are willing to accept payment per transaction, e-retailers’ upfront investment to add such features drops. Jeff DeCoux, president and CEO of personalization software company eCustomers, says even a small degree of personalization can go a long way toward serving shoppers better-and driving up sales. “Let’s say you walk into a general merchandiser in Minnesota in the middle of winter. It’s appropriate for you to see snow blowers. Walk into the same merchandiser in Texas, and it isn’t. Yet when you log onto their web store, you get a big blend of all the products they stock from point to point. Customers have a difficult time tracking down what they want. It’s a one size fits all approach, and we wonder why conversions aren’t more effective,” he says. The Austin, Texas-based company this spring rolled out software that transmits shopper preferences to participating web merchants as an anonymous score linked to corresponding demographic profiles that let the merchant instantly tailor web site content to the shopper’s interests. It also gives shoppers the ability to access and change their information to reflect what they want to see on different shopping occasions.

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