Online Ads Versus Catalogs -- Data Point From Red Envelope (REDE, GOOG, YHOO)

| About: RedEnvelope, Inc. (REDEQ)

There's been much discussion recently about the rising cost of online advertising, particularly pay-per-click search engine ads. As a result, some e-commerce companies have explored alternative approaches to customer acquisition, including TV ads and catalogs. Here's a telling comment on this topic from Red Envelope CEO Alison May on Red Envelope's conference call (full transcript here):

On the marketing fronts, we were able to reduce our marketing expense as a percentage of sales from 25.8% to 22.8%. However, the catalog continues to become less efficient as a means of new customer acquisition. We are re-evaluating our catalog circulation strategy and have hired an outside agency to assist us in the process. While impossible to quantify, I do believe that our advertising campaign last year helped drive traffic to our site and that we might have underestimated the positive impact that had on our growth last year. Our total marketing spend was basically flat with last year but we shifted those advertising dollars to catalog, a strategy that was not as successful as we had planned. We made many improvements to our website including multiple imaging of products, targeted messaging for new and returning customers, customer testimonials with a link to biz rate and articulation of our value proposition. This did improve our conversion but we did not drive the amount of traffic we drove last year when we had the advertising program in place. Given what we have learned, we are looking at alternative customer acquisition and retention strategies for holiday 2006.

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