Cutting costs isn't working, says a new study

Conventional dot-com wisdom today says cut, cut, cut to become profitable, but the strategy isn't working, according to a study released today by Getzler & Co. Inc., a New York-based turnaround firm. Instead, cost-cutting has resulted in significantly lower growth rates which could further undermine companies' already depressed valuations. In a study of 213 technology and dot-com firms, Getzler & Co. identified 57 companies that had implemented cost cuts, particularly in the area of sales and marketing. Getzler then studied the impact of these cost-cutting measures on the companies' financial performance. "We've heard time and again how dot-coms are reducing costs in order to become profitable," said Brian Mittman, vice president, Getzler & Co. "But what we've learned is that, rather than help the company, cost-cutting reduces sales growth so drastically that profitability becomes nearly impossible." The study analyzed first- and second-quarter results of firms with more than $1 million in quarterly sales. On average, the cost-cutting dot-coms grew sales at an annual rate of only 19%, yet lost $1.20 for every dollar of revenue. "At that rate, even assuming certain costs remain constant, it will take many years for these companies to become profitable," Mittman said. "And investors aren't likely to wait that long." The average growth rate for cost-cutting dot-coms severely lagged the growth rate for firms that increased spending - 19 annually vs. 149% annually. "A 19% growth rate is typical of a healthy traditional firm, not a dot-com which is operating deeply in the red and whose stock price has factored in expectations of several years of very high growth," Mittman said. Amazon.com typified the study's conclusions. The company reduced sales and marketing costs in the second quarter, but experienced virtually no growth.

Among the 57 cost-cutting firms studied, almost half were e-retailers. The e-retailing sector is facing particularly skeptical investor sentiment, making it increasingly difficult for these firms to attract additional funding. The result has been a wave of belt-tightening. The study also corroborated analysts' souring opinion of the loyalty of dot-com customers. Dot-coms have spent vast sums of money - in many cases, most of their capital - on marketing, reasoning that such expenditures were necessary to build a loyal customer base. "But if your revenue drops as soon as the dollars stop flowing into marketing programs, you have to question customer loyalty and the wisdom of continuing to invest blindly in extravagant marketing campaigns," Mittman said.