Investments in brand marketing pay off for large e-retailers

Heavy investment in brand campaigns by seven large pure-play e-retailers selling low-margin, low-priced products generated more online revenues than the catalog and direct-mail campaigns used by 28 large niche retailers of high-priced, high-margin products, research and consulting firm McKinsey & Co. reports.

The large pure-play retailers—dubbed efficiency machines by McKinsey—invest hundreds of millions of dollars into brand marketing and innovative web sites. They include sites that sell CDs, books and computers. Amazon.com, alone, invested more than $400 million in marketing and technology in 2004, McKinsey says.

Of the top 100 direct retailers studied, the seven efficiency machine sites accounted for more than 25% of total online revenues, McKinsey says.

In comparison, the 28 niche leaders—online retailers such as L.L. Bean and Ross-Simons—accounted for only 6% of total online revenues. Niche retailers sell higher-priced and higher margin items—such as apparel and jewelry—primarily through catalogs and over the Internet.

The efficiency machine sites drive repeat business by offering deals to customers, for instance, Amazon’s $79 annual membership that includes unlimited two-day shipping, McKinsey found.

But niche leaders can’t afford expensive brand marketing and rely instead on targeted online or direct-mail campaigns, McKinsey says. The most innovative niche leaders coordinate marketing channels, for example, making products from their catalogs easy to order online.

Niche leaders generated nearly $15 billion in revenues, about 17% of which came through the Internet, McKinsey says.

McKinsey studied 100 of the largest direct retailers in North America.