Alphabet Inc. today reports that Google’s advertising revenue rose 19.5% in the second quarter.
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In spending to drive that growth, on a continuum between funding development out of cash flow as Replacements does and the “If you build it, they will come” model of an Amazon, Home Décor Products falls somewhere in between. The company has spent big on building the platform but less on building the brand to date, under the rationale that building the web presence attracts business to build a cash flow.
And so, in its earlier years, the company focused budget on building the central platform-not only the technology that powers the web stores but also applications such as analytics, call center operation, warehouse operation and “basically everything that gets touched by a sale,” Golden says. Historically, Home Décor Products has kept marketing expenses between 7.5% and 8% of sales; but with annual revenue hitting $100 million in 2006, Golden says he’s looking at boosting that to 9%.
“We knew we had to get to a certain size to really cover our operating costs, and based on the business plan we created it was about $100 million. We think now we can grow to several times that size without having to add a lot of bodies,” he says. That’s key because employees-alongside freight and marketing-have been the company’s biggest expense. If growth can come without an increase in staffing-an advantage Internet retailers enjoy over their colleagues in the offline world, where more stores of necessity means hiring more workers-that frees up more of the budget for marketing.
It’s also part of Home Décor Products’ business plan that as the company scales up, budget priorities change. Not only are more dollars going to marketing than in earlier years when the platform was still under construction, but the strategy driving allocation of marketing dollars is shifting as well, including a new look by the company at offline marketing.
“In the past, in terms of our marketing spend, we were more focused on being ubiquitous. Now we are focused on the bottom-line and optimization, on the things that drive efficiency,” Golden says. Among them, this online-only retailer is going back to a traditional marketing vehicle. Based on a test of 50,000 in-box catalogs for HomeClick.com over the past holiday season that drove an estimated $300,000 in incremental sales, Home Décor Products expanded distribution to 250,000 for a new paper catalog slated to launch last month; the expanded distribution includes 150,000 that were mailed for the first time.
“We’ve invested in the platform for seven years. We’ve built it. Now the goal is to identify incremental marketing spend to drive incremental sales. For us, that largely means looking offline,” Golden says. “We spent a decent amount of money on the catalog and we’re hoping for the best.”
The approaches taken by these e-retailers to allocating funds differ, but they all aim at a common issue plaguing the budget process at most companies. “There are always more good ideas than money,” Cavens says. “Maybe Microsoft’s the exception. But at any retailer, cost control is a challenge and we work within those constraints.”
While retailers try various ways of balancing that equation, Aldrich says one winning budgeting strategy is to start with the first principles of business-even online. “First principles went out the window when the Internet boom arrived in the ‘90s, but the rules of business never really disappear,” she says. “The old joke about selling below cost and making it up in volume didn’t work in 1980, and it doesn’t work now. You just have more uncertainties now than you had before.”
At its most basic level, that translates into assessing the biggest problems or opportunities and taking the budget there first. “In theory, you put your money where the biggest return is going to be,” Aldrich says. But retailers should tread carefully-even if they’ve developed a rule of thumb that says spending this amount of money on this aspect of the e-commerce structure will deliver this kind of return; ultimately that depends on how well they execute.
The next step is to build onto that frame of reference a more creative view that accommodates what’s new about retail in the online environment. “Here are your principles and the traditional way to think about things,” Aldrich says. “Then, open your horizons a bit and look at some of the trends and new business models and see if they apply to you.”