Running on empty

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When dot-coms awoke at the end of spring to find their coffers nearly empty, many pulled the plug on marketing. Suddenly dot-coms touted slashed ad budgets as proudly as children with straight-A report cards. Prudence replaced aggressive, pull-out-all-the-stops extravagance as a badge of honor.

But in cutting back on marketing spending, what were dot-coms risking? Evidently not much, contends Charlene Li, senior analyst at Forrester Research.

"Usually if you decrease your marketing, your revenue will take a hit. But what I've found is that a lot of these dot-coms were wasting their marketing dollars," she says. "So by cutting their marketing dollars, it didn't have any impact on revenue because the advertising wasn't doing anything in the first place."


That's why, looking at data from Pegasus Research International, she says she can understand why the revenue of companies such as BigStar Entertainment,, iGo and Launch Media were relatively unscathed after cutting marketing spending in the first half of the year.

On the other hand, Pegasus data show dot-coms -- such as,

Ameritrade, CNET Networks,, MotherNature.-com,,,, VitaminShoppe.-com and -- actually saw revenue rise after cutting marketing spending from the fourth quarter of last year vs. the second quarter of this year.

But businesses such as,, CDnow (which German media giant Bertelsmann acquired in September), Prodigy and saw their revenue drop after marketing-budget cuts, Pegasus data show.

Then there are companies whose revenue shot up as they spent more on advertising. Among them are HotJobs,, Charles Schwab & Co., Webvan Group and Wit Capital. All increased sales and marketing spending during the first half of 2000 and experienced jumps in revenue during the same time period.

The dot-coms cite a variety of reasons for the different ways their revenue responds to spending cuts. For example, some saw revenue rise because of the advertising they did last year. Others generated revenue when they dropped consumer ad sales for business-to-business business models.


For example,, once an informational portal, merged with ticketing software company Advantix in the second quarter of 1999. By the beginning of this year, the company had shifted from being an entertainment portal that relied on traffic and ad revenue to a software company that sells back-end ticketing systems to sports arenas and other entertainment venues. That meant consumer advertising was less important; as a result, the company cut its sales and marketing expenditures 36% from the fourth quarter of 1999 to $10.6 million in the second quarter, according to Pegasus. Meanwhile, revenue jumped 10% from last year's fourth quarter to the first quarter of this year and another 5% to reach $14.8 million in the second quarter.

"[Our revenue] is going up as a function of the quality of our back-end ticketing systems and our ability to get organizations to buy that. The change is the result of really a shift in business model from the historic," says Tim Kelly, president. cut marketing again in the third quarter.

SmarterKids, a site that sells educational books, games and software, more than halved its marketing budget from the fourth quarter of last year to $7.3 million in the first quarter, and trimmed it again to $7.1 million in the second quarter, Pegasus data show.

But unlike, SmarterKids' revenue dropped 65% from the fourth quarter to $1.5 million in the first and second quarters of 2000.

Al Noyes, exec VP-sales and marketing at SmarterKids, shrugs off the quarterly revenue decline as insignificant, pointing instead to a 412% annual jump in revenue to $1.5 million when comparing the second quarter of this year to the same period last year.

"The revenue growth is still there year-to-year and that's our objective," he says. As for its advertising efforts, Mr. Noyes says: "We did some experimentation with a lot of broadcast media and we found it simply doesn't work. Because we are quite mercenary with regard to how we use our budget, we did stop broadcast. In Q1 and Q2 we've been more selective . . . in terms of cutting back in some of our long-term commitments."

For example, the company didn't renew deals with portals "because the cost per new customer was unacceptable," Mr. Noyes says. "As we learn more, we can be smarter about how we spend our money."

One smarter move is spending more on online advertising and off-line partnerships with groups such as Junior Achievement and better targeting its audience, he says. SmarterKids plans a fourth-quarter online campaign this year; HookMedia and Orsatti & Partners, both in Boston, will handle.

"Last year, SmarterKids was a nascent business. The most important thing we could do was prove we could get people to the site and get them to buy." Now that the site has critical mass, he says, it's focused on understanding and addressing customer needs.


"We just installed a new analytical software package . . . that allows us to combine information from our customer field, product file, Web logs and advertising to understand where we're getting the best customers and how to market to them most effectively," Mr. Noyes says.

Greg Kyle, president-CEO of Pegasus, says SmarterKids' move is common among dot-coms.

"One of the trends that became evident early on was that they spent heavily during '98 and '99 in an effort to really become a market leader within their particular niche," Mr. Kyle says. "That can be an effective strategy in terms of building the brand and gaining market share."

Once companies gain significant market share, Mr. Kyle explains, "they can scale back their spending and revenue will continue to grow."

But for many dot-coms, the market tightened up just as they were diving headlong into heavy marketing spending. For companies that didn't have enough time to establish their brands and reap the rewards of advertising, the risk was greater that revenue would suffer, Mr. Kyle says. "If you don't have a market leadership position, it would be very difficult (now) to establish yourself as a leader and to capture market share."

HALVING ANNUAL SPENDING, which announced third-round funding of $50 million in March, halved its annual ad spending in September to $8 million to $10 million "to be responsible users of our cash," VP-Marketing Gene Cameron said at the time (AA, Sept. 4). That's significantly less than the $60 million in annual spending the company once envisioned. The company also decided in September to bring online ad development in-house; MarchFirst, Santa Monica, Calif., previously handled.

In lieu of an estimated $12 million offline campaign from TBWA/Chiat/Day, Playa del Rey, BizRate decided to ramp up its online efforts, a move President-CEO Chuck Davis says is more cost-efficient. BizRate also believed it had sufficiently built its brand through a $10 million offline campaign last fall so that scaling back would not be detrimental. Plus the company decided online marketing makes more sense.

"In this business, you have full accountability for your spend in an online environment," Mr. Davis says. "You can see what it cost and what you got for it. We might go offline again. But for now, we're in an online mode."

BizRate also is eyeing an initial stock offering, but waiting until "the markets are right," Mr. Davis says.

Like SmarterKids and BizRate, other dot-coms eschewed expensive offline campaigns in the first half, opting to channel their dollars to more affordable online advertising.

"They may be spending less, but they may be getting more bang for the buck because they are spending it more wisely," Ms. Li says. "They are doing . . . less of the traditional mass-media advertising that was just going bonkers in the fourth quarter. They are spending more wisely and the creative is getting more focused."


"It's difficult to show the hard return on investment from some of the reach advertising," explains Jeff Sheahan, president-CEO of He says the company could no longer justify the expense of TV advertising that was difficult to measure, especially since the company's brand awareness studies showed Egghead's brand was fairly well-established. Egghead cut sales and marketing expenditures 65% from the fourth quarter of 1999 to the first quarter and another 6.8% in the second quarter, leaving spending at $20.4 million.

At the same time, however, Egghead saw its first-quarter 2000 revenue drop 14.7% to $126 million by the second quarter. Mr. Sheahan says, however, the revenue drop was not related to the marketing cuts.

"For us, it was not advertising-related. It was a conscious, internal decision to stop [selling] products below cost," a strategy the company previously used to acquire customers but one that was not helping the business become profitable, Mr. Sheahan says.


Instead, Egghead, a company that targets consumers and businesses, is ramping up telemarketing. It will hire about 300 telemarketers by next March. Of its 3.5 million registered users, Mr. Sheahan says 10% are businesses.

The company also is focusing more on direct marketing and what Mr. Sheahan calls installed-base marketing. It will continue to advertise online, but is shifting many contracts to pay-for-performance deals and away from cost per thousand impressions, Mr. Sheahan says.


Egghead used to work with Grey Advertising, but has since "parted company" with the New York agency, Mr. Sheahan says, opting to handle advertising in-house. "With our b-to-b orientation, I don't think we need a creative agency or that expense for what we are trying to accomplish."

HotJobs advertised in the past two Super Bowls and plans to advertise in the upcoming game in January via Weiss Stagliano Partners, New York. It spent more on sales and marketing in the first half of 2000; revenue also rose during the period.

The online job search service, for which the fourth-quarter holiday season is not a peak time to advertise, spent only $8.4 million in the fourth quarter of 1999 and had revenue of $8.6 million. It more than doubled its sales and marketing expenditures early this year, spending $19.7 million in the first quarter and $19.9 million in the second quarter, according to Pegasus. Revenue jumped 66% from the first quarter to $22.8 million in the second.


Dimitri Boylan, chief operating officer of HotJobs, attributes the rise to effective advertising.

"Our advertising continues to remain very strong," Mr. Boylan says. "We will probably spend more in sales and marketing next year than this year. This year [we're] looking at spending $40 million to $50 million," adding that next year's marketing expenditures will be "well north of $50 million."

Still, even HotJobs has learned some advertising lessons. It thought hard about whether it would advertise in the next Super Bowl, for example.

"We did the Super Bowl at a time when we knew we needed to get our brand out there," Mr. Boylan says. "We realized that in order to build a brand, you need to do more dramatic things. We had to pick a marquee event." Advertising in the Super Bowl cost "a lot of money, but it paid off." But the second time HotJobs advertised in the Super Bowl, it was crowded by other dot-coms. "It became a way to define yourself with the dot-com population."

The company is proceeding with its financial plan. "Analysts are predicting that we are showing a profit by Q4 2001," Mr. Boylan says. "We are closing the gap and approaching profitability."

HotJobs continues to evaluate its marketing strategy.


"Do we have a lot to learn? Yes, absolutely," Mr. Boylan says. "The good thing about us is we have a good revenue model and a lot of money and the legroom to hone and refine our marketing strategy."

Refining marketing strategies remains at the top of dot-coms' agendas, at least for the time being. All seem to have learned lessons from their spending sprees, some more painful than others, analysts say. For some, early steps to control spending could have allayed the challenges they now face.

"For a lot of these dot-coms, they were just spending out of control. If they were following a real plan, they wouldn't be cutting back in the first place. Or if they had to cut back for budgetary reasons, if they had a plan they'd be able to cut back judiciously so they [would not have to risk lowered revenue]," Ms. Li says.

"There is a dark side to slashing marketing expense and that is that revenue can decline," adds Mr. Kyle. "The net effect of that is the further erosion of market share."

But what if, for financial reasons, dot-coms have no choice but to cut back on marketing?

"That's one of the prices to be paid for not managing your growth effectively, which is why you will see consolidation in the sectors. The companies will fold altogether or merge," Mr. Kyle says. "It's just Darwin at work within the Internet sector."

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