Retailers shift their ad spending from TV, radio and print ads to digital ads.
Insisting from day one that it would pay only for advertising that produced demonstrable results, Shoebuy.com recently recorded its fifth quarter of profitability, driven in part by an average customer acquisition cost of $7.
When two former bankers started up Shoebuy.com three years ago, they were determined to make a profit on their first sale. That meant keeping down the cost of acquiring customers. They achieved that goal by a steadfast insistence that they would pay only for marketing that produced measurable results.
Revolutionary then, the practice has become SOP in online retailing. And it’s the reason that Shoebuy.com recently recorded its fifth quarter of profitability, driven in part by an average customer acquisition cost of $7. By contrast, the most recent figures from trade group Shop.org calculate the industrywide average at $14, down from $29 a year earlier. “That was one of the best decisions we made,” says co-founder and CEO Scott Savitz.
Getting to that number wasn’t easy. But Savitz and co-founder Craig Starble, who left positions as investment managers at BankBoston (now Fleet Boston Financial Corp.) to launch Shoebuy in January 2000, were determined from the start to avoid the approach that other dot-com startups took in spending heavily on advertising before securing sales. “We were scratching our heads about customer acquisition costs,” Savitz recalls.
Its focused marketing has resulted in sharp growth. With 150,000 products from more than 200 brands, it also boosts sales with free standard shipping and the ability to search by eight criteria, including brand, color and width, Savitz says. With 1.5 million monthly visitors, including 1 million unique visitors, Shoebuy last month reported that it is on course to hit $16 million in sales this year, up from $10 million last year and $3.5 million in 2001, Savitz says.
The two partners had a hunch that the advertising market was about to shift, resulting in terms more favorable to buyers. So they set out to sign contracts only if the terms let them pay for advertising that resulted in a sale.
It took some tough negotiating, but the two persevered. When Savitz and Starble entered their first contract negotiations for pay-for-performance online advertising, most sellers balked at the new concept, Savitz says. “We had many people walk away from doing the deal,” he says. And most of those stepping away from the table offered the venues Savitz and Starble wanted the most, such as major shopping portals.
But Shoebuy stuck to its guns, then saw a change of attitude by mid-2001. “As the advertising climate changed, people were more willing to experiment,” Savitz says. “About 80% of those that walked away from advertising contracts came back.”
Savitz says Shoebuy’s marketing strategy has paid off for many of the sites where it advertises as well as boosting its own profits. “Once we see results for high enough volume and sales, we don’t care if advertisers want to change our terms,” he says. “We’ll work off different structures, such as cost per thousand or cost per click. It all comes back to the customer acquisition cost.”
And when advertising works well, Shoebuy buys more of it, Savitz says. “At 9 out of 10 of our advertising partners, we’ve increased advertising,” he says. “If we find a relationship working, we’ll buy as much exposure as possible. It often exceeds the level advertisers initially hoped we’d spend.”
Shoebuy supplements its online advertising with e-mail marketing to a list of about 400,000 customers who have registered their e-mail addresses. “The most effective part of our e-mail campaigns is letting our members know when we are launching new styles of a brand they like to buy,” Savitz says. He adds that e-mail is an essential tool for retaining customers. “It proves to be a huge complement to our other online advertising,” he adds.
The e-retailer encourages customers to give their e-mail addresses by granting 10% discounts on purchases when they register on Shoebuy.com. The registration is followed by e-mail updates on product offers.