Average online customer acquisition cost fell to $14 in Q2, says Shop.org

Customer acquisition costs and overall ongoing marketing spending continued to drop sharply among online retailers in the second quarter of this year, according to quarterly data from the ongoing Shop.org/Boston Consulting Group study, “The State of Retailing Online.”

“Our second quarter study shows that despite the continued shaky economy, retailers operating online have weathered the first half of 2001, due in part to the development of stronger operational efficiencies,” says Elaine Rubin, chairman of Shop.org, the online retailing arm of the National Retail Federation.

In Q2, retailers reduced online customer acquisition costs to $14, down 65% from a year earlier. Retailers also have reduced their overall marketing spending by focusing on direct marketing in both online and offline forms, rather than mass media advertising, the Q2 survey found. In Q2 2001, retailers spent 35% of their marketing budgets on proprietary, targeted media – e-mail, catalogs and direct mail – up from 21% a year ago. Correspondingly, spending on print advertising decreased to 7% of retailers’ marketing budgets in Q2 from 22% during 2000. TV advertising dropped to less than 1% of marketing budgets in the second quarter, down from 7% a year ago. Online portal advertising and online banner ads remain the only significant forms of mass marketing being used by retailers selling online. Portal deals accounted for 23% of marketing budgets in Q2, as in Q1. Banner ads accounted for 13% of Q2 budgets, the same as in Q1, but up from 9% in 2000. The balance of spending went to affiliate programs (14% now vs. 6% in 2000) and other offline advertising (8%).

To improve profitability, retailers recently have increased prices, renegotiated portal deals and reduced staff. These measures have edged online order conversion rates down, but only slightly, according to Q2 data; to 2.2% in Q2 from 2.3% in Q1.

“These tactics may result in a slower growth trajectory, but higher margins,” says Peter Stanger, Boston Consulting Group vice president. “Pricing in particular is often an underutilized lever to improve profitability. As retailers gain experience with the online channel, we will see more sophisticated pricing strategies emerge.”