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Issue #549- May 2 2000 Business in Vancouver

The High Tech Office: It's hard to make a profit with a typical Web site

by Alan Zisman

There?s the beginnings of a sense out there that we?ve gone overboard in dot.com mania?that it may be time to retrench-- to sit back and think about what?s meat and what?s sizzle.

Earlier this year, at Toronto?s Internet World 2000, Marco Argenti, Chief Technology Officer of Ontario-based Microforum (www.microforum.com) talked about the dilemmas facing e-tailers?online retailers. In the minds of many retail firms?both those with traditional storefronts, and new Web-only businesses a Web presence is ?considered a must, in terms of customer service, rather than a plus?. Still, even the best-known e-tailers seem to rarely be profitable.

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 260 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. Argenti suggested that this user base was set for huge growth, especially internationally, with many new users expected in Europe and Asia, and the Pacific Rim in general.

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 information?they may use the Internet to research holidays and car purchases, influencing 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 websites. 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 percent 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 number, according to Argenti) might cost $34,000. For that, your average 0.5% click-through translates to 5,000 visitors. If you further get the average of 2.7% paying customers you end up with a total of about 135 sales. That means that it cost you $252 per customer.

But the average online retail sale is only $162?so all these statistics mean that your ad campaign cost you $90 per sale?and that?s ignoring all the other costs involved in setting up and maintaining an online retail Web site. (And helps to explain how seemingly successful online retailers 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, scoffers might note that this means that online sales still represent a pretty small 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 still-humble one percent doubles the number of potential customers, halfing the cost per sale. This improvement can be achieved through strategies such as careful 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?, but 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, potential customers will go elsewhere. Standard marketing and retail policies like 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 product gets to the buyer, how you?re set up to deal with returns and other support issues aren?t directly Internet issues, but can have a big effect on whether 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.
 



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Alan Zisman is a Vancouver educator, writer, and computer specialist. He can be reached at E-mail Alan