Retailers are getting smarter with their money and it`s paying off. Customer acquisition costs are going down while conversion rates are going up.
Some good has come from the tough economic times online retailers have been experiencing. With money tight, retailers are being smarter with their marketing dollars and it’s starting to pay off. The Q1 2001 Shop.org survey of 79 online retailers revealed that acquisition costs dropped substantially in the last 18 months. Retailers paid $80 to acquire a customer during the holiday season 1999 and $18 in Q1 of this year.
“This is a sharp trend in the right direction,” says James Vogtle, director of e-commerce research at Boston Consulting Group, which conducted the study with Shop.org. “The question is how much lower can it go and how can merchants improve on this?”
Also, conversion rates are increasing, the result of smarter marketing and greater experience in designing sites.
Before the dot-com crash, many retailers blew millions on broad marketing campaigns, haphazardly pouring money into unproven marketing efforts that did not produce sales, he says. Vogtle says the money crunch has made retailers more efficient with marketing dollars, seeking out methods that provide solid results. Part of that change is the adoption of more targeted marketing among online customer bases.
“It’s easier to target more finely with online media than with offline,” he says, adding that much of the offline advertising has dropped off in favor of online efforts, which he says produces results that are easier to measure. Spending on print advertising, for example, dropped from 22% of marketing budgets in 2000 to 13% in Q1. Television advertising dropped from 7% of budgets to 2%. The only mass media that retailers continue to rely on for advertising are the portals, which accounted for 23% of marketing budgets. Meanwhile, e-mail campaigns were 19% of retailer marketing budgets, banner ads were 13%, affiliate deals were 6%, catalog and direct mail campaigns were 15% and other programs were 9%.
While acquisition costs are moving down, retailers can still do more. “Retailers do a fairly coarse job of segmenting now, but as online retailers get more sophisticated, they will be able to segment their customer bases even further,” Vogtle explains.
Conversion rates rose from an average of 1.5% in Q1 2000 to 2.3% in Q1 2001. Vogtle says retailers have learned a lot about how to design web sites and are starting to implement the lessons they’ve learned. “Retailers are getting better at presenting the product in a compelling way and improving the customer experience on the site,” he says.
Even so, retailers have a way to go. “The increase in conversion rates is a nice improvement but it still means that more than 97 out of 100 consumers who visit a web site don’t place an order,” Vogtle says. “There’s obviously lots of room for improvement here and this will be retailers’ top priority this year.”