Out-of-sight spending collides with reality

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Out-of-sight spending collides with reality Still in the red: Dot-coms have clipped marketing, but more cuts must be made in the short term if they hope to have a long term By Bradley Johnson

The good news is dot-coms have lost some irrational exuberance. The bad news is marketing spending at most dot-coms is still out of whack. Business-to-consumer dot-coms cut sales-and-marketing spending as a percentage of revenue to 69% in the second quarter, according to a study done for Advertising Age. That's far below the 94%--94ยข for every dollar in revenue--shoveled into marketing in the fourth-quarter folly.

But dot-coms have a long way to go before they reach reality. The average rate of sales-and-marketing spending at b-to-c dot-coms is likely to fall to 25% to 40%, says Greg Kyle, president-CEO of Pegasus Research International, which produced the study.

"I wouldn't be surprised if we see that in some (b-to-c) sectors by the first or second quarter of 2002," says Mr. Kyle.


Some dot-coms--including Amazon.com and eBay--are already at or below that rate. But even then, dot-coms still would have work to do. In the offline world, Wal-Mart Stores last year spent just 16.4% of revenue on sales, advertising, administration and general expenses--and less than 1% of sales on advertising. Procter & Gamble Co., the nation's largest packaged-goods advertiser, last year spent 28% of revenue on marketing, research and administration; one third of that went to advertising.

Mr. Kyle estimates that b-to-c dot-coms plow about two-thirds of sales-and-marketing expenses (SME) into advertising.

He attributes the fall in dot-coms' second-quarter SME to three factors.

The key factor, he says, was cost-cutting in the wake of the spring technology stock slump as dot-coms moved to conserve cash and attempt to show investors fiscal responsibility. The other factors were seasonality and the maturing of top-tier dot-coms to a stage where they have established their brands and are in position to pull back their SME rates.

Pegasus is an independent institutional researcher known for the dot-com cash "Burning Up" study it produced early this year for Barron's. Pegasus reviewed market-ing spending for Ad Age in four sectors of b-to-c dot-coms representing 75 companies.

Last year, the SME rate rocketed in the third and fourth quarters as dot-coms punched the accelerator. E-tailers, for example, had an average fourth-quarter SME rate of 109%, according to the Pegasus study. If a retailer spends 109% of revenue on marketing, that doesn't leave a lot to pay for the goods the customers are buying.


E-tailers' SME fell to a somewhat less spendthrift 75% in the second quarter.

This year's second half will be a different story. Mr. Kyle forecasts the average b-to-c SME rate this quarter could fall a few points and then maybe bump up a few in the upcoming fourth quarter--still far less than fourth-quarter '99--as dot-coms press for holiday traffic.

In the final quarter, that could put the SME rate in the ballpark of 70%--a world of difference from the 94% average seen in the final months of 1999. Ad agencies and media won't get much of a Christmas bonus from dot-coms this year.

"The days of spending 100% to 400% of revenues on sales and marketing are gone," Mr. Kyle says.


The dot-com debacle is no surprise. "Madison Avenue has truly gone mad--but call it a state of temporary insanity," Ad Age reported last fall at the height of dot-com advertising mania (AA, Nov. 1). "Signs point to a dot-com shakeout. . . . Numerous comp-anies--and ad budgets--will evap-orate in 2000. It's a good bet that spending will become more rational and disciplined as dot-coms are forced to show some return on investment. . . . Likely prognosis: Hundreds of dubious dot-coms will disappear; dot-com launches will be more select; and the strongest dot-coms will get stronger, with the marketing clout to leave lesser sites in the dust.com."

So the story plays out.

In the second quarter, mean SME rates for e-tailers and for e-content ventures--portals, media properties, job sites--were well south of 100%. Marketing spending rates for ISPs also have come down. SME rates for financial sites in the second quarter were unchanged from the fourth quarter in the category less affected by seasonal tides; Mr. Kyle says their spending tends to be discretionary and tied to opportunities in the market, where online stock trading is still booming despite the pullback in technology stocks.


Averages mask the remarkable range of marketing spending rates. In the Pegasus study, E-Stamp took the top spot--or bottom spot, if you prefer--with an SME rate of nine times revenue in the second quarter. The good news: That's down from the fourth quarter, when the stamp site's SME rate was nearly 17 times revenue.

Mr. Kyle reserves harsh judgment of E-Stamp.

"This is an example of a company that is very early in its growth stage and its life cycle," one that's "fairly well capitalized" in a category with good prospects, he says.

He's more concerned about flagging e-tail outfits such as PlanetRx.com, Pets.com and health-products site MotherNature.com, all of which in recent days traded below $2 a share. A big concern: Even after declines in SME rates, the trio last quarter spent from $1.79 and $2.19 on sales and marketing for every dollar of revenue.

Bricks-and-mortar drugstore Walgreen Co.'s ad spending of $58.7 million last year was only twice that of PlanetRx--though Walgreen's retail sales were more than 2,000 times that of the dot-com.


In the study, Pegasus also tracked two other key marketing metrics: Customer acquisition cost and cost to attract a visitor.

Among e-tailers, Ashford.com had an acquisition cost above $300--plausible, perhaps, since its luxury goods aim at a narrow target, Mr. Kyle says. He's more concerned about PlanetRx, which he figures has an average sale of about $26 and a cost to acquire a customer of $153.

Among content sites, there were significant variations in the cost to attract an audience. Quokka Sports last quarter spent $18.60 on sales and marketing for each visitor, according to Pegasus calculations. That's about $16 more than what SportsLine.com spent.

Overall, competitors tend to spend at similar SME rates. Examples include Amazon.com and Buy.com; E-Stamp and Stamps.com; and Webvan Group, HomeGrocer.com (being bought by Webvan) and Streamline.com.

There's no magic number for the right SME rate, Mr. Kyle says, given that companies operate at different stages and in categories with different prospects.

Is there a wrong SME? Perhaps "anything that's north of 50%" on a long-term basis, he says, adding, "Definitely over 100% is the wrong number" on a long-term basis.

"If they're a third-tier player and they're spending north of 100% on sales and marketing," Mr. Kyle says, "my comment would be: `Good luck.' "

Copyright August 2000, Crain Communications Inc.

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