A Forrester report points out challenges faced by some business-to-business firms working online.
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2CoolTek uses the shopping cart technology of Freemerchant.com, an e-commerce platform. As the name suggests, Felts doesn’t pay anything for the service; Freemerchant makes money from partnerships with companies that provide services to 2CoolTek and the other small businesses that use Freemerchant. He uses HyperMart to host the 2CoolTek home page at a cost of $10 per month.
While Johnson, Silberman and Felts all sound satisfied with the progress their sites have made, none is ruling out joining forces with another company, or selling altogether. Johnson, for instance, notes that Underneath.com is constrained by its limited capital.
“We want to grow faster than what the business can do,” he says. “We’re not scalable. We couldn’t support 10,000 orders per day if we got them.”
Johnson’s comment brings up what may be the biggest threat facing profitable niche players: many don’t have the resources to significantly scale up without taking on a partner. This is critical, says Vogtle. In addition to unique products, niche players that plan to stay around for a while need the capacity to grow and handle larger volumes of business. Both Johnson and Silberman, for instance, have talked with potential investors and partners.
Still, the fact that these retailers have done as well as they have so far shows that solid business practices and strategies-finding a unique market, knowing one’s customers and developing innovative ways to stretch a budget-are as applicable on the web as they are off.
A competitor to Underneath.com, complete with a reportedly high-priced management team and venture funding, sprang up in Atlanta-Underneath’s own backyard. The company spent itself out of existence, and eventually was sold, says Johnson.
Underneath.com, which had been operating out of Johnson’s late grandmother’s house and was viewed as backward by the technology leaders in Atlanta still is alive and growing. “We’re now in a real office/warehouse in Atlanta, and we’re the number one site in this market space,” says Johnson.
Karen Kroll is a Minnesota-based freelance business writer.
E-retailers sharpening focus
In their quest for profit, e-retailers are improving performance while taking steps to increase profitability, says a recent Shop.org/The Boston Consulting Group survey. “We are seeing the results of this more focused approach, as online retailers improve performance on the key metrics with the largest impact on the bottom line-customer acquisition cost, conversion rates and loyalty rates,” says James Vogtle, director of e-commerce research at BCG. “Online retailers will need to continue this disciplined approach to reach profitability.”
These findings, based on a survey of 66 North American online retailers, show customer acquisition costs continuing to decline from $71 in Q4 1999, to $45 in Q1 2000, to $40 in Q2. This is partly due to a shift from television advertising to online advertising and marketing. While this is a significant decline, overall customer acquisition costs remain higher than in Q3 1999 ($35).
As well, e-retailers are spending less on brand awareness, focusing more on customer retention. This strategy is paying off as almost half of their revenues in Q2 came from repeat buyers, up sharply from 1999.
“The average online retailer requires three purchases to break even on the acquisition cost of each new customer,” says Kate Delhagen of the 400-member trade association Shop.org. “With the high cost of acquiring new customers, many online retailers are focusing on increasing the frequency of purchases from existing customers.”
Other findings from the survey include:
- Conversion rates improved in Q2 (1.9%) vs. 1999 (1.8%).
- Marketing budgets spent online jumped to 59% in Q2 from
49% in Q1.
- Returns as a percent of revenue dropped to 5.7% in Q2, down
from 7.6% in Q1, and in line with the 5.6% observed in 1999.
- 86% have specifically addressed the issue of profitability.
- 29% deferred site upgrades.
- 11% of survey participants used layoffs to improve profitability.