E-retailers Closing in on Profitability

Online retailers are making a slow, steady ascent up Mt. Profitability.

E-retailers have marginally improved their performance while taking concrete steps to increase profitability, according to a recent Shop.org/The Boston Consulting Group survey. Customer acquisition costs have decreased and order conversion rates have risen.

"We are beginning to see the results of this more focused approach, as online retailers have improved performance on the key metrics that have the largest impact on the bottom line -- customer acquisition cost, conversion rates, and loyalty rates. Online retailers will need to continue with this disciplined approach in order to reach profitability," says James Vogtle, director of E-Commerce Research at BCG. BCG is a Boston-based management consulting firm.

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These findings, based on survey responses from 66 North American online retailers, show that customer acquisition costs continue to decline from a high of $71 during Q4 1999, to $45 in Q1 2000, to $40 in Q2. This is due, in part to a shift away from relatively expensive 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, online retailers are spending less of their marketing budgets on pure brand awareness and are now focusing more on customer retention. This strategy is beginning to pay off as almost half of their revenues in Q2 came from repeat buyers, up significantly from 1999.

"The average online retailer requires three purchases to break even on the acquisition cost of each new customer," says Kate Delhagen, chairman of Shop.org's Committee on Internet Shopping Research. " With the high cost of acquiring new customers, many online retailers are focusing their efforts on increasing the frequency of purchases from existing customers, in order to reduce acquisition spending and achieve profitability more quickly." Shop.org is a 400-member Internet retailing trade association.

Other findings from the survey include: * Order conversion rates have improved slightly in Q2 (1.9%) compared to 1999 (1.8%). Note: Order conversion is derived from the number of orders received divided by the total number of visits during a specific time frame. * The percent of marketing budgets spent online increased sharply 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.

Beyond these incremental improvements in performance, online retailers also appear to be taking significant steps to improve profitability: * 86% of survey participants have specifically addressed the issue of profitability. * Although 40% re-negotiated or cancelled their portal deals, online advertising actually increased to 59% of total marketing spend. Retailers likely re-directed their spending towards more targeted approaches. * 29% indicated that they had deferred site upgrades. While this represents a short-term cost saving tactic, retailers could experience longer-term consequences in the form of decreased customer satisfaction with the online shopping experience. * In contrast to the recent media emphasis on dot-com layoffs, only 11% of survey participants used layoffs to improve profitability.