News & Announcements

November 2000 , Arthur Andersen Retailing Issues Letter

The Internet has shaken up the retail industry and brought about a revolution in the way we sell and shop. Pure play online 'etailers,' like Amazon.com and BlueFly.com, and online "brick and click" extensions of traditional retail stores, like jcpenney.com and Wal-Mart.com, have fueled the growth of e-commerce.

Industry analysts estimate that 85 million North Americans use the Internet, increasing to approximately 175 million within three years. Approximately 60 percent of Internet users shop for or research products online, and 43 percent have made at least one purchase online. In the first six months of this year, consumers spent $36.8 billion online, and more than 80 percent of online buyers say they expect to buy more in the coming year according to The Industry Standard and Odyssey Research.

Furthermore, the implications of the Internet extend beyond online shopping for retailers. More than 60 percent of online consumers maintain that if they are dissatisfied with a company's Web shopping site, they are less likely to purchase from that company's traditional store, according to a recent Boston Consulting Group (BCG) study, "Winning the Online Consumer."

But before we get swept up in all this e-commerce momentum, we need to get serious about building on-line brands.

Style Over Substance

Marketing is the only function that truly grows a business--not finance, not operations. As management guru Peter Drucker has written, "Because its purpose is to create a customer, the business enterprise has two-and only two-basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are cost."

The primary objective of marketing is to build a brand. Strong and admired brands achieve higher levels of financial performance and can more easily convert marketing investments into increasing levels of market share and profitability. The average total return of Fortune's top 10 most admired companies last year was 49.4 percent, compared with 20.3 percent for the S&P 500. The average total return for the 10 least admired brands was a dismal negative 51.4 percent. Just as importantly, strong and admired brands close the gap between market potential and current performance.

Without question, etailers definitely understand the importance of marketing and building brands. Many a pure-play company actually based their entire business model on marketing. But when it comes to practicing marketing, many etailers have followed the same intuitive and counterproductive approach to marketing that plagues the Old Economy.

For a long time, etailers believed that marketing and brand building were relatively easy. Go "first to market" with a rave new Internet concept and "grab land." Create a site so cool that the viral marketing-efforts that spread information about a company like a virus-goes wild. Then mix it up with requisite brand juice--edgy brand names, beautiful logos, clever tag lines, big-ticket promotions to lure people to Web sites, rave launch parties, non-stop publicity, and lots and lots of advertising.

But drinking brand juice gets you about as close to building a brand as reading bumper stickers gets you to spiritual enlightenment.

Style over substance cannot build a brand. Simply put, a brand is ultimately based on more than marketing communication alone. Product quality, customer service, employee communications, management vision and leadership, and social responsibility all influence a brand's reputation.

Boo.com, the much-hyped UK-based clothing etailer, is a case in point. The e-commerce company burst onto the scene in May 1999, launching advertising and public relations campaigns in nine countries, spending approximately $25 million of a planned two-year $65 million budget. But then the company shifted its launch date to July due to technical and logistics problems, and then again to October.

"Boo.com had grand visions of being the answer to a new generation of fashionable youth," explained Marina Galanti, Boo.com's second marketing director. "Ultimately they weren't able to remain focused on who they were targeting." Indeed, after initially positioning the brand as an online retailer of hip luxury, the company started offering discount clothing. Despite the change in strategy, the advertising message stayed the same. Customer confusion and frustrations mounted, as did losses.

With the help of well-publicized examples like Boo.com, etailers are recognizing that obsessing about advertising and publicity rather than addressing the fundamentals of marketing will not get them where they need to go.

As stock price anxieties mount and branding opportunities on the Internet abound, it's time for etailers to recognize that a new channel of retailing also necessitates new, counterintuitive approaches to branding and marketing.

Real retail brands are by definition not commodities. They are unique and distinct in terms of their attributes, benefits, features, and associations-and are resistant to price sensitivity in the marketplace. Mixing a solid foundation from which to build a strong and admired brand requires five key ingredients: a financially-optimal customer target; a potent positioning; clear and consistent communication of the brand's "reason to buy" message; communication of the etailer's marketing message using an effective mix of promotional vehicles; and delivery on the brand's promise through exceptional service.

Not All Eyeballs Are Created Equal

The search for growth in any market--even virtual markets--begins with understanding the customer. Most marketers realize that focusing on subsets of consumers is the most efficient way to develop a marketing program, and the targeting decision--identifying people we want to direct our marketing efforts towards--is one of the first issues a marketer considers. Most also agree that when choosing a target market, a company ought to consider the prospects' profitability.

Initially, etailers have focused on getting any potential customer interested in their product or service without considering what it will cost to reach these people, how many will buy the product or service, or how much money they will spend. Any and every customer looks like a good target group, and profitability gets ignored.

But with no defined target, etailers will find themselves stuck trying to reach everyone and be all things to all people. As an example, once hailed as an e-commerce pioneer, Value America burst onto the scene in 1996, peddling everything from underwear to computers-targeted at no one audience in particular. Using an inventory-less model, customers ordered through Value America's site but received their goods directly from the manufacturer. In 1999, the company spent a whopping $69.6 million advertising budget only to restructure in late December, paring its operations from dozens of product categories to its original core of five. Plagued with customer service problems, order fulfillment delays, nearly flat margins, and shareholder class action suits, the company filed for bankruptcy in August 2000. "A year ago," bemoans one insider, "we were infallible. Now, it's completely crash and burn."

Etailers are already beginning to recognize that not all "eyeballs" are created equal--some are much more valuable than others--and that they need to define target groups. Instead of targeting everyone in the market for jewelry, Blue Nile, one of the most successful jewelry etailers, targets men who dislike jewelry stores even though most of the jewelry they sell is for women. Blue Nile's market research found that men are about as fond of walking into a jewelry store as sitting in a dentist's chair; most said that they are uncomfortable in jewelry stores, often feeling pressured into buying something. Blue Nile takes away the pressure, allowing men to browse, research, purchase hard-to-find diamonds, and even have diamonds set into special designs.

The Great Mind Grab

Once an etailer has identified the financially optimal target group, the next step is to create a powerful positioning. In an increasingly cluttered environment where buyers have very little time to ponder product decisions, it is advantageous to stand for something important, to be remembered for something significant. A powerful positioning leads to a powerful brand.

But positioning is a difficult concept for even the most experienced marketer to grasp because it embodies the value proposition--the bundle of benefits and attributes the etailer wants to offer buyers at a certain price to positively differentiate the product or brand from competitors. It's a message so clear, so succinct, but so powerful that, once launched, it begins to move customers and prospects toward the brand. Most importantly, it is a compelling message to the target group.

Sadly, most etailers have no clear positioning at all. Their sites and products look almost identical to those of their competitors, and few can demonstrate how they stand apart from their rivals. Most etailers pay the price of admission to enter a market--whether it's offering free shipping or discounted prices or another common feature the other market players offer--then sit back and watch the movie just like everyone else.

Being "first to market" is not a positioning strategy; a first-mover etailer may have "grabbed land," but the key to survival is grabbing a piece of customers' minds. The first online music retailer had an enviable early first-mover advantage as one of the first well-run music etailers. The company used sophisticated online marketing techniques and created positive buzz with consumers as well as digerati. Recently, the company was acquired for approximately the same amount of money spent on their total marketing efforts. Why? Largely because of an undifferentiated brand value proposition or lack of potent positioning. The site provides a great user experience, an extensive product selection, great search capabilities, and realizable delivery and service. But then again, so do many other music etailers, including Amazon.com and Tower Records.

On the other hand, BlueFly.com positions itself as a convenient discount designer clothing site for on-line shoppers seeking bargain prices, an online equivalent of Loehmann's. The site reinforces its positioning with a personalization feature called MyCatalog, which creates profiles of each customer's tastes and sizes to help make it easier to find designer items.

Fatbrain.com also has a unique positioning. The site provides scientific and technical information--books, technical documentation, training documents--to companies and organizations in highly technical fields like engineering, biotechnology and computing.

More Than Getting Them in the Door

After determining a positioning, the next step for etailers is to translate the positioning into messages and experiences, which deliver on the brand's value proposition. This is no easy task for etailers because, even though they have multiple points of contact with consumers-through advertising, customer service, the product delivery, and the site, among others-they have precious little time with the consumer. Clarity and consistency of message become essential to reinforcing the positioning of the brand in the minds of consumers and giving them a reason to buy from the etailer.

Many etailers, however, have made the mistake of focusing on getting customers "in the door" so to speak, delivering a compelling reason to visit but not a reason to buy. One cosmetics seller developed stunning print ads that conveyed an avant-garde attitude. But the site was just the opposite: boring and ordinary. "I typed in the site thinking, 'wow, look at this ad, this is going to be great'-and it was, well, mundane," says Wendy Liebmann, president of WSL Strategic Retail. "It's as though they put all their money into the ad and nothing was left over for the shop."

With etailing customer acquisition costs of $82 versus $31 for a bricks-and-mortar store customer, according to the BCG study, the financial stakes to deliver a satisfying and enjoyable online shopping experience are considerable. On average, consumers will wait 8 seconds for a site to download before moving on to the next search item. If they make it onto the site, according to a recent McKinsey & Co. study, 63 percent of North American companies' online customers do not become repeat shoppers, in contrast to only 46 percent of European companies'online customers. Furthermore, consumers who do have a very satisfying first-purchase experience engaged in 12 online transactions and spent $500 online during the past 12 months, according to the BCG study. On the other hand, consumers who reported a very dissatisfying first-purchase experience engaged in only four online transactions and spent an average of only $140 during the same period.

Most online shopping experiences are woefully lacking. While Internet shopping promises convenience, many shopping experiences are anything but. BCG found the most common and frequent online purchasing problems to be a list of inconveniences (see table).

To get customers in the door, buying, and coming back is a multi-step process of delivering a message and an experience. When people go to a site, they must understand the value of what's being offered in less than 30 seconds. Bluefly.com, for example, delivers its positioning as soon as a consumer accesses the site with the message, "The outlet store in your home," and lists the names of top designers available on the site. In addition, the total shopping experience must meet--if not exceed--the consumers' expectations in order to move the shopper from browser to first-time buyer to repeat customer.

Advertising Alone Is Not The Answer

Much to etailers' detriment, they to date have used advertising as the primary method for delivering their marketing messages. During the 1999 holiday season, U.S. Internet companies spent $1 billion on advertising in traditional media, yet Active Research found that nearly a quarter of Internet users polled couldn't recall a single dot-com ad they had seen on television. Of the top ads that were remembered, just 3 percent of the respondents could recall the brands associated with them. Countless other dot-com brands are also on deathwatch because they focused too much on advertising to get a trial as opposed to building a brand.

Etailers have begun to rethink their marketing communications strategies. Recently, a study by Shop.org and the BCG reported that 86 percent of Web retailers took steps to curb costs during the second quarter, including 28 percent that reduced spending on TV ads. Etailers today must look for more efficient ways to communicate their brand message-and many are making significant progress. For example, LetsTalk.com, an etailer of cell phones and service plans, slashed its spending on expensive billboard, radio, and TV advertisements. Instead, it does most of its marketing online and has cut its customer acquisition costs by 80 percent. Other dot-coms have followed suit with the portion of marketing budgets spent online increasing.

Drugstore.com, also founded on the model of spending big on TV ads to speed brand itself into a major player, is also readjusting its strategy. In place of expensive television ads, the company is now reaching targeted customers less expensively with email. According to market researcher Jupiter Communications, the cost of customer acquisition with email is about $6, a third of the cost of direct mail.

ITurf, a network of teen-oriented ecommerce and community sites including gURL.com, The Spark.com and delias.com also shuns TV advertising, using far more cost effective Internet marketing approaches. Earlier in 2000, ITurf passed MTV.com in audience size.

The lesson in all these examples: advertising alone is not the answer. Integrating marketing communications efforts and utilizing multiple approaches to reaching customers is a much more powerful and cost-effective way to induce trial and build a brand image.

Service Rules Supreme

Service is, of course, de rigueur for delivering the experience aspect of a brand's positioning and improving customer retention. A recent Jupiter Consumer survey found that among respondents almost 75 percent of online buyers said that customer service is a critical factor in shopping satisfaction, yet only 41 percent are happy with dot-com customer service.

Delivering good customer service has been a challenge for etailers. Last Christmas, for example, an on-line toy retailer wasn't able to deliver on its promoted promise of product delivery. Nothing worse than Christmas without the toys. To help assuage customer anger, the company gave online customers $100 gift certificates to its bricks-and-mortar stores. The debacle increased the on-line company's losses for 1999 by 20 percent.

One of the most desired customer service features is also one that is the easiest for etailers to deliver: prompt and helpful email responses. When customers go to a site, it should be extremely easy for them to determine how to email questions and concerns. And then etailers have the responsibility to promptly, within 24 hours max, respond to the customer's email. This customer service feature is very obvious yet is consistently ignored by etailers of all sizes and types. Jupiter Customer Service WebTrack has found a 28 percent failure rate among top sites; the failure rate is defined as not having an email option or taking more than five days to answer an email.

The ability to easily return products is also highly important to consumers. In fact, 85 percent of online buyers claim this is one of the most important factors in their online etailer selection. Several retailers are making progress in this area. For example, The Gap and Eddie Bauer allow online consumers to return products to traditional stores. Kozmo, an Internet pure play delivery service of video rentals and snack foods, has partnered with Starbucks, allowing customers to return videos at Starbucks' locations. Further lessons can be learned from traditional catalog companies like L.L. Bean and Land's End, who have created partnerships with UPS and Federal Express to make it easier for their catalog and Internet customers to make returns. In a further evolution of their business model, Stamps.com has also begun to offer services to etailers for customer returns.

Etailing In Here to Stay

Despite bumps and some failures, etailing is here to stay. More than 40 percent of online retailers are profitable, especially those who have targeted a customer segment and provided an offering and associated service that delights their customers. Furthermore, the opportunities for online etail brands are tremendous. With the exception of the book and CD categories, which are dominated by Amazon.com and Barnesandnoble.com, other product categories still have no strong online brands.

Also encouraging is the opportunity for retailers to sell across multiple channels-stores, catalogs, and online. Many online consumers use the Web to research products that they will buy either at a traditional retail store or through a catalog. Approximately 70 percent of online consumers say they will buy only a brand that they know and trust, whether it's online or offline. Increasingly, consumers are choosing to do business with companies across multiple channels rather than in a single channel. As a result, multichannel companies are well positioned to capture consumer interest in all channels.

While tactical approaches differ in some areas, the fundamental marketing rules for e-commerce are the same as for traditional commerce: you can't build a brand on style alone or achieve profitability without targeted marketing efforts. Failed or struggling etailers took an intuitive approach to marketing; they followed the crowd and made decisions based on gut instincts. Unlike their intuitive competitors who target anyone and everyone, forget about positioning, and rely on advertising alone, successful etailers, on the other hand, have taken a counterintuitive approach to marketing. They have understood the importance of finding a target group and a compelling positioning, communicating with customers clearly and consistently, and overcoming a reliance on advertising and service shortcomings. As etailers learn how to balance intuition and experience with serious marketing research, successful marketing and stronger brands will emerge.

About the Author

Dr. Kevin Clancy is the co-founder, chairman, and CEO of Copernicus, a Newton, Massachusetts-based firm that provides innovative marketing consulting and research services to dramatically improve business performance. Copernicus uses state-of-the-science methods and models to help major corporations and emerging businesses around the world develop, test, implement, and monitor superior marketing programs for consumer and business markets.

Dr. Clancy has been a consultant for two decades to major corporations around the world, including Auto Zone, Chase Bank, Citizens Bank, Exxon/Mobil service stations and convenience stores, Pizza Hut, Saks Fifth Avenue, and The Rouse Company. Dr. Clancy's published books include The Marketing Revolution: A Radical Manifesto for Dominating the Marketplace (HarperCollins, 1991) and Marketing Myths That Are Killing Business: The Cure for Death Wish Marketing (McGraw-Hill, 1993). Dr. Clancy's new book, Counterintuitive Marketing: Achieve Great Results Using Uncommon Sense (The Free Press, 2000) will be in bookstores beginning in December 2000. Dr. Clancy can be reached at info@copernicusmarketing.com.

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