Tight Belts for Dot-Coms

Welcome back to reality, dot-coms. Word has it that you have stopped spending like it was going out of style. You are clinging to the remnants of your venture capital and the windfall you reaped from your IPO. Good thing. Just one question: Don’t you think it’s a bit late?

According to the results of a new study from Pegasus Research International commissioned by Advertising Age, e-tailers cut sales and marketing costs by 25 percent from the last quarter of 1999 to the first quarter of 2000.

Now, that quarter was a special one in a lot of ways. Companies were falling over themselves to lock in customers during the holiday season, hoping that they could make lifelong loyalists out of them. It was also ramp-up time for many an e-tailer, a time when marketing costs are naturally going to be high. Still, at 94 cents spent for every dollar of sales, the margin for error was awfully small.

Morning Is Breaking

But the report points to more than a quarter-over-quarter trend or a short-term belt tightening. The results indicate that light bulbs are finally going on over the heads of CFOs at dot-coms everywhere. Spending money is not always the best way to make money. Ding. Spending more money doesn’t mean making more. Ding again.

Even so, e-commerce companies still don’t qualify as marketing bargains. At 69 cents spent for every dollar of revenue, dot-coms are still on track to lose money. They’re just not moving quite as fast.

An Advertising Age editor said the numbers show a “somewhat more rational approach to marketing.” The operative word is “somewhat.” When the horses are galloping out of the corral at an alarming rate, closing the gate “somewhat” won’t do the trick. The loose horses will likely run wild and never be recaptured. Likewise, much of the initial funding the dot-coms lost has already turned up in money heaven.

Reversing the Trend

Stanching the flow and reversing it are two different operations. There is an ominous correlation between dot-coms that lay workers off and dot-coms that fail. I would not be surprised to learn of a similar link between companies that drastically cut marketing costs and companies that go under. In other words, if you try to turn the ship around too sharply, you may capsize, and we could be reading your corporate obit sometime soon.

There was once a widespread belief that money would steadily flow to e-commerce like rivers to the sea. When it became clear that the streams were drying up — round about March when the tech sell-off got hot and heavy — that belief was shaken.

All of a sudden, profitability became the immediate goal. But because profitability had taken on the tissue-thin substance of one of Harry Potter’s sorcerer tricks, no one seemed sure how to go about getting it.

Easy Questions, Tough Answers

There are no easy answers. For some companies, there are no hard ones, either — it is simply too late. But those who still have a chance must take decisive steps away from the extreme practice of promising customers the moon, without veering too far in the other direction and promising nothing but aggravation.

Spending big to acquire customers is a tried and — to some extent — true method of building a business. But it can also become a deeply ingrained habit. How do you suddenly stop giving away deep discounts? Halt a months-long free shipping promotion? Cancel that multi-media advertising buy, when you’re sure your branding efforts are just about to reap results?

The answer is: You just do. Will some customers leave when you tell them that now they have to pay five bucks a pop for shipping? You bet they will. But the idea that every customer can be retained forever is the thinking that caused this problem, remember?

Let them go — but make sure that before they leave they know you are making a good faith effort to provide the highest quality at the lowest possible prices. Let them know you care about their business — but show that you care about your own, too.

If free shipping is not feasible for most Web companies, then it probably isn’t for yours, either. If your biggest competitor is selling widgets for $15 (US$), then you will probably take a beating when you price yours at $11.

All Quiet — For Now

It has been relatively quiet on the shakeout front for the past few weeks. No one really believes it’s over, but clearly, some ailing companies have found new ways to hang on. Stock prices haven’t exactly ricocheted back to their earlier levels, and venture capital is drying up, so the logical explanation is that some dot-coms have gotten smarter.

Perhaps being honest and thrifty will be enough to convince investors, potential employees and even customers that your dot-com ship is seaworthy. But it will take a while. Passengers jumped on board once without counting lifeboats or checking the hull for gaping holes. They’re likely to be a lot more cautious next time.

What do you think? Let’s talk about it.