 |
|
|
 |
 |
December 2000 |
  |
Portals deliver the world to e-retailer`s door, but now they must lock up sales too
By Mary Wagner
Chris McCann had a portal deal before other merchants had a clue about what the Internet was. His company, 1-800-Flowers.com, was one of the first merchants to appear on AOL. And in the six years of that ongoing relationship, this veteran e-retailer has learned a thing or two about why such deals work for marketers.
“You can’t go out there with wild expectations,” says McCann, president of Westbury, N.Y.-based 1-800-Flowers.com. “They need to be based on a realistic idea of what an advertising program can do.” McCann refuses to pay portals in anticipation of sales unless the program in question has a successful history of producing revenue for 1-800 flowers. Until the track record is established, portal deals are revenue-sharing—with incentives—for both newcomers and new properties of even long-established portal partners.
“I don’t invest in something unless I know it works,” McCann says. “I’ve let many portal deals go to competitors over the years because either I knew for sure they wouldn’t work, or I wasn’t sure but the risk was too high.” When his criteria are met, McCann believes portals can pay off—and they’re the foundation of 1-800-Flowers.com’s current 5-year,
$42 million portal deal with AOL.
Tying payment to performance, setting realistic goals, and building out the relationship gradually as a track record is established—they’re all lessons learned too late or simply ignored by some e-retailers in forging portal partnerships. Portals such as AOL and Yahoo have held an undeniable allure for e-retailers seeking eyeballs. They’ll continue to do so as long as ratings services keep showing them to be the most-visited places on the web.
But now analysts say the deals are not for everyone, and, for some, not worth the high prices being paid only a few years ago.
Now, major portal deals are being renegotiated as e-retailers scramble to cut their cost of acquiring customers. The deals are more focused on performance, and e-retailers that claim success with major portals today say they’re managing the relationships more tightly than was the case in the Internet’s early gold-rush days. No longer do smart web merchants agree to hand off big chunks of cash to portals and then simply sit back and wait for sales to roll in.
Meanwhile, the big portals have new competition in the form of niche or affinity-based portals. Organized around interest groups and user preferences, they offer e-retailers what some say is a more effective way to target consumers. At the same time, many e-retailers are adopting offline marketing techniques such as print and billboard advertising and catalogs.
“Given that Yahoo has millions of online customers and they’re prepared to charge for access to them, it makes sense for e-retailers to ratchet back the use of portals and look for other ways to build awareness,” says Andrew Bartels, vice president and head of e business research at Giga Information Group, Cambridge, Mass.
Vitamin deficiency
Take VitaminShoppe.com, a nutritional supplements provider. Last December, it entered a two-year, multi-million dollar deal with AOL that would sprinkle it in as many places throughout the portal as Bill Gates has dollars. It was an anchor tenant in the diet and nutrition marketplace of Shop@AOL and a gold tenant receiving prominent placement in several other AOL departments. The deal also included promotions on AOL’s CompuServe, AOL.com, Digital City and Netscape.
But by September, VitaminShoppe.com was pulling out, citing a dispute with AOL over the performance of their advertising relationship. It cranked back its presence on AOL primarily to the health department and said it would drop out entirely after October—an announcement that bumped up share value up by 20% that day. VitaminShoppe.com has declined further comment, but the balance sheet tells at least part of the story. For the first half of the year, marketing expenses accounted for more than 80% of the company’s $18 million in sales with an $18 million net loss. The company is now focusing on less costly direct mail marketing and print advertising.
“People have wised up across the board,” says Heather Dougherty, an analyst with Jupiter Media Metrix. “We’re seeing more of a movement toward direct marketing. It’s more response-based and it can be measured. The portals claim they help build brand, but they’re not really delivering for e-retailers unless they give them something they can measure.”
There’s a vein of big-portal bashing running throughout the industry, with legitimate questions about whether the portal deals have delivered on expectations of retailers who committed big bucks to them. But in an echo of what McCann has learned about the web, some analysts say the larger question is how a value was placed on the deals in the first place, and whether those expectations were ever realistic.
“No one knows except the people sitting around the table at those negotiations,” says Rob Labatt, research director at the Rockville, Md.-based Gartner Group. “If you asked those people how they set those numbers, chances are they’d say they don’t know, they just thought it was a good number. There was no history then, and the future was seven shades of rosy.”
That begs the question of whether portal deals still make sense as an e-retail strategy. Portal-bashing aside, the experience of many e-retailers makes the answer a qualified “yes;” the deals just look different from how they used to look.
Precious details
While sales driven directly through portals are increasingly part of measuring portal deal performance, web merchants and portals guard the details like Brink’s guards payroll deliveries. McCann won’t say how much of 1-800-Flowers.com’s $385 million in sales come through the AOL deal, but he reports that 30% of total sales are from various portal relationships, of which AOL represents the largest share.
At Bluefly.com, the web apparel merchant, the formula for portal deal performance blends the number of impressions, click-throughs, and revenues the company wants from the portal—effectively, the cost per customer it wants to achieve in the deal.
The merchant then works with the portal partner to achieve it. Vice President Jonathan Morris won’t say whether the targets are actually specified in the contract, but he does report that the company and its portal partners share data on performance regularly. “We don’t want to wake up 12 months after the contract was signed and say, that deal was terrible,” he says.
Companies such as Bluefly that exist only on the Internet have another challenge in making portal deals work. In a fast-changing market where they must bob and weave to survive, the rigid, multi-year portal commitments of earlier times make little sense. Yet the tens of millions of shoppers on AOL, Yahoo and MSN were just what Bluefly was after when it launched in 1998. It got what it wanted by negotiating deals with all three portals—but only for one year at a time.
And it dedicated staff to supply what Morris believes is the missing ingredient whose absence can tank a portal deal: tight management. BlueFly has a full-time manager and additional support to oversee each deal with AOL, Yahoo and MSN. They’re in constant communication with the portals. Based on measures such as the number of impressions, the number of click-throughs they receive and the dollars they generate, Bluefly knows which promotions are working best, which areas of the portal perform best, and where in the portal to concentrate impressions, expand them or pull back; and it acts on the data in real time.
“It requires someone at the portal and the merchant talking daily to monitor and manage the deal,” says Morris. “Even with as much negotiation and back-and-forth as goes into the portal deal, it doesn’t compare with the work that goes on after you sign the contract in monitoring performance and working to make sure it flourishes.” The result? Customer acquisition costs have dropped more than 70% at Bluefly over the past year, due in large measure to what it’s learned about how to work with the portals.
More for the portals
Jupiter has forecast that the percentage of e-commerce driven directly by major horizontal portals, now estimated at 18%, will grow to 20% by 2002. But Forrester Research predicts the value of advertising deals with vertical and niche portals will grow more dramatically. Currently representing about 35% of online advertising dollars, these deals are expected to win 57% of online advertising dollars by 2004.
What does that mean? As web merchants become ever more sophisticated in their approach to Internet merchandising, the marketplace is moving away from an earlier, one-size-fits-all solution to one with options to fit different types of retailers and different purposes. Top portals AOL, Yahoo and MSN will remain a force in the marketing mix for those mass market e-retailers that can afford them and that can push through deals that link pay to performance.
For other Internet merchants, opportunities on more narrowly focused affinity or niche portals—ranging all the way from the horse enthusiasts’ Clipclop.com to the female-targeted Women.com—may be a better bet. Though they offer a smaller pool of potential buyers, it’s a qualified group more likely to increase conversion rates. “For example, if you’re a music retailer, aligning yourself with a genre-based music affinity portal makes more sense than aligning yourself with Yahoo” says Dougherty. “It’s a lot more efficient.”
Home furnishings e-retailer GoodHome.com found that out soon after it launched in July 1999. The San Rafael, Calif.-based web merchant initially signed short-term deals with approximately 10 online distribution companies, ranging from mass-market aggregators including AOL and Yahoo to specific search engines such as Excite to lifestyle portals.
Today, it’s scaled back on the number and depth of those relationships, finding that in a home furnishings market where 80% of purchasing decisions are made by women, affinity portals including Women.com drive its highest conversion rates.
“We found that to get value from someone like an AOL, we have to be in very specific areas of the portal,” says Doug Mack, CEO.” We couldn’t be run of site, we had to be in home and garden or home shopping to generate paying customers. Women.com matched our customer demographic. We found we could be in almost any area of the site and get valuable visitors and customers.” Today, he adds, Women.com consistently ranks first or second among GoodHome’s portal relationships each quarter in its ability to drive sales.
Industry-watchers predict that as time goes on, the affinity and niche portals stand to change the dynamics of online marketing just as pay-to-surf sites gave rise to performance marketing, Labatt says. “Obviously, lower customer acquisition costs are better,” he says. “And if the niche portals can deliver repeat purchasers at a lower cost than the major portals, they’ll do well. It all comes down to the numbers.” 
|
|
 |
|
