The High Tech Office: It's hard to make a profit with
a typical Web
by Alan Zisman
There?s the beginnings of a sense out there that we?ve
in dot.com mania?that it may be time to retrench-- to sit back and
about what?s meat and what?s sizzle.
Earlier this year, at Toronto?s Internet World 2000,
Chief Technology Officer of Ontario-based Microforum
talked about the dilemmas facing e-tailers?online retailers. In the
of many retail firms?both those with traditional storefronts, and new
businesses a Web presence is ?considered a must, in terms of customer
rather than a plus?. Still, even the best-known e-tailers seem to
The first question is to determine how big is the
market-- how many
potential retail customers are out there. Surveys have proposed widely
varying answers?claiming that in 1999 there were anywhere from 100 to
million on-line shoppers.
But what defines a shopper? In some surveys, Argenti
pointed out, an
?active user? shopped online once a month?not very active, perhaps.
suggested that this user base was set for huge growth, especially
with many new users expected in Europe and Asia, and the Pacific Rim in
Part of the problem is that the Internet isn?t
primarily a place where
people go to shop. People pursue hobbies and get news and
may use the Internet to research holidays and car purchases,
future spending, but hardly anyone has replaced a day at the mall with
a day online.
When all the numbers are added up, there are more or
less 250 million
online shoppers?but pursuing them are an estimated 100 million
Not good odds for any particular online merchant. The trick, according
to Argenti, is to generate repeat customers.
To further explain why repeat customers are so
important to e-tailing
success, look at a hypothetical online store starting off with a banner
ad campaign to attract the public. Statistics suggest that a mere 0.5
of viewers of an Internet banner ad click through to visit the site. Of
those, 2.7 percent go on to actually make a purchase. Typically, 20 to
40 percent of these customers will return and buy again.
And it?s a good thing there are those repeat
customers. Look at the
cost of attracting a first time buyer. A million banners (a modest
according to Argenti) might cost $34,000. For that, your average 0.5%
translates to 5,000 visitors. If you further get the average of 2.7%
customers you end up with a total of about 135 sales. That means that
cost you $252 per customer.
But the average online retail sale is only $162?so all
mean that your ad campaign cost you $90 per sale?and that?s ignoring
the other costs involved in setting up and maintaining an online retail
Web site. (And helps to explain how seemingly successful online
can fail to show a profit year after year).
With repeat customers, however, you have a chance to
make back your
costs?and who knows, maybe even eventually make money.
It can be done. Some Web stores do well. The Gap?s
online store, according
to Argenti, is the fifth busiest location in their chain. (Of course,
might note that this means that online sales still represent a pretty
portion of their total sales).
E-tailers can take steps to improve the odds. The
first step is to look
at ways to improve click-through rates on banner ads?even a
one percent doubles the number of potential customers, halfing the cost
per sale. This improvement can be achieved through strategies such as
targeting where your ads appear?you can arrange it so the ads for your
sporting goods store appear when a user is searching for ?baseball?,
not when searching for ?lingerie?.
Your website plays a vital role. It can increase sales
if it is attractive
and efficient?if it takes too long to load or is hard to navigate,
customers will go elsewhere. Standard marketing and retail policies
pricing are equally important.
Along with your website, what happens after your
customers click that
Submit button helps determine whether they come back. How quickly the
gets to the buyer, how you?re set up to deal with returns and other
issues aren?t directly Internet issues, but can have a big effect on
you?ve created a profitable repeat customer or simply made another sale
at a loss, according to Argenti.
Next week, just in time for BIV?s special issue on
success, Marco Argenti?s
10-step program for successful e-tailing.