Retailers shift their ad spending from TV, radio and print ads to digital ads.
Few segments of online customers are proving to be profitable for Web merchants, according to a new study by Bain & Co. and Mainspring Communications. The findings, released today, grow out of interviews with more than 2,000 online shoppers in three categories: apparel, groceries, and consumer electronics and appliances. In consumer electronics and appliances, only 24% of consumers--those buying based on a trusted brand or on the convenience of Internet shopping--generated all of the profits. In online groceries, the same two segments, "brand buyers'' and "convenience shoppers,'' represented only 31% of customers but nearly two-thirds of profits.
Other segments identified by the firms--"casual buyers,'' "relationship seekers'' and "bargain hunters''--are considerably less profitable for retailers and even money-losing, the study's authors say. "Many online retailers are focused on trying to swell their revenues by attracting any and all possible traffic to their sites,'' says Darrell Rigby, director at Bain & Co. "Instead, online retailers should take a more focused approach because all customers are not created equal. It's more important to have a loyal group of the right customers than to have lots of the wrong ones.''
The study modeled the economics of two online grocery retailers with significantly different customer profiles. After a year in business, Internet grocer code-named Brandmart, whose business model focuses on selling branded products, is more profitable than the second, Pricemart, whose business model focuses on selling the least expensive product. Over time, the disparity widens.
Brandmart breaks even during its third year and goes on to reach sustainable levels of profitability. Pricemart, on the other hand, never becomes profitable, and its returns worsen as customers defect and the remaining unprofitable customers refer more unprofitable customers.
"The most profitable customers were far more likely to have heard of the site through direct mail, word of mouth or television/radio,'' says Randall Hancock, vice president at Mainspring. "The average (and far less profitable) grocery buyer was more likely to have heard of the site through a banner ad or email from the retailer.''