Online Retail: Ready to Capture More Market Share

CNBC’s Margaret Brennan had an interesting piece about the effectiveness of marketing dollars in online retail.

What is interesting to me are the different ways that internet stores are reaching customers to bring them “in store” — online.

One of the most effective ways is also one of the cheapest: Forrester’s Research shows that e-mails sent to repeat customers by stores involves the cheapest marketing cost ($6.85 is the average cost per order), while yielding a high average order value ($120.27 average order value).

Search engine shopping is also among the cheapest ($8.63 average cost per order) while yielding a high return ($109.73 average order value.) These cheap marketing tools are helping retailers maximize profits.

Earlier this year, I had written a post in response to an article by Henry Blodget, where I suggested that during an economic-slowdown, marketing dollars will increasingly move online since they allow retailers to get the quickest bang for their marketing dollars. The data from CNBC seems to confirm that search is a highly effective method of generating sales, especially among new customers who traditionally have much higher acquisition costs than existing customers.

Though online retail grew by 17% year over year, it still represents just 7% of the total retail market, leaving a tremendous amount of upside. High gas prices are also pushing customers to shop with their mouse instead of driving to a store. They not only save the time and the gas money, but are also able to comparison shop to get the best deal. Many online retailers do not charge sales-tax for out of state residents and offer free or discounted shipping, which is helping push more shoppers online.

The effectiveness of search as a medium to drive sales bodes well for the undisputed leader in search, Google (GOOG). Google’s stock has been under immense pressure this year with questions about how the economic slowdown will affect online advertising. Financial and mortgage related firms have been cutting back on their online marketing. The unfreezing of the credit markets and government actions to spur mortgage refinancing means that we are sitting on the cusp of another big boom for mortgage vendors. I expect the mortgage vendors to come back aggressively into the online advertising market to make up for the lack of business over the past year.

Comments

[chrism1962]

I understand your point regarding online marketing, but I would appreciate your views as to how this is likely to impact on "bricks and mortar" retailers.

Will they close their low margin stores?
Will they make their shops smaller in size?
Will they use this to renegotiate cheaper leases at malls?

Most retailers do have an online presence, although a few entities are much better than the majority?

[Vikram]

Hi Chris:

Thank you for your comments.

The focus of my article was on how search engine marketing is cost effective for online retailers. It is especially useful since often it leads to the acquisition of new customeres, at a cost comparable to what advertising to existing customers costs. Specifically I feel that Google has a lot to gain from its dominance in that space.

Brick and Mortar retailers will weather this downturn as all others before. The chains which are not well run or can not manage their inventory well will wither away. Retailers who offer a unique value proposition (e.g. An Apple Store, or Urban Outfitters) will prosper. Discount stores, especially warehouse stores will do well. General purpose department stores which do not offer anything unique will definitely suffer, especially those which compete with Walmart.

Over the longer term, B&M retailers will have to distinguish themselves and their offerings to survive. Online retailing will thrive because of the convinience it offers. Amazon now has a subscribe and save service where you can sign up for delivery of staples at regular intervals, and get a discount. So if you have kids and use a lot of diapers or formula, you can sign up to receive the products at your door-step at a 15% discount! B&Ms who count on consumer staples for a bulk of their earnings will have to evolve to compete in the non-perishable segment.