Web Expenditures: Sharpening your e-commerce spend

We all know the Internet is a significant and growing chunk of a catalog’s business: Our average business-to-consumer client now receives 50% or more of its orders through the Web channel.

With this shift in channel, companies are spending more on Website development, search engine optimization, online marketing, Web-hosted systems and so on.

We interviewed dozens of multichannel marketers, consultants and service providers to get a sense of how merchants are spending in relation to their strategic marketing priorities. What did we find out?

For one thing, while we know merchants are spending more on e-commerce, it’s hard to get an accurate read on the total amount. Identifying e-commerce spending activities in one place is not easy for many companies.

P&Ls are not organized in an activity format, but an expense-center order. So if you asked a merchant for the annual cost to support its Website, the company would likely be pulling together expenses from across the P&L.

The cost to create, print and mail catalogs typically ranges from 25% to 35% of net sales; e-commerce spend is additional. Five years ago, cataloger expenses for e-commerce marketing were 2% to 5% of total sales.

Now most multichannel businesses spend at least 5% to 10% of sales on e-commerce marketing; ad expenditures of Web pure-plays range from 15% to 20% of net sales.

E-commerce is not that cheap

To determine your total e-commerce spend, start by identifying all online expenses: IT costs, personnel for marketing and merchandising, content, outside services, and the portion of catalog expenses used in e-commerce.

It adds up to more than you may think, because expenses are spread between IT, writing content, search, marketing, merchandising and a percent of call center expenses supporting customers. The IT support for a Website-alone model may be 1% to 4% of net sales.

You also have to understand where your Web traffic comes from. Do most customers come in to your Website directly to the URL, through natural search, via pay per click, e-mail marketing or affiliates?

And then you must accurately measure response rates and costs. Identify for each channel, effort and offer, the cost, response rate and profitability. Before e-commerce, direct marketing methodically measured its offers and calculated response.

E-commerce media thoroughly complicates this analysis today, says Al Bessin, a partner at catalog consulting firm Lenser. “Many marketers, especially on the Web side, believe e-commerce is inexpensive,” Bessin says. “But you have to fairly allocate demand by channel, determine the costs equitably, and then create downstream analysis to compare financial results.”

It all starts with appropriate data collection, Bessin says. “E-commerce really isn’t cheap when we think forward to the changes in marketing and merchandising, content, Website changes, experimentation with social media, etc. that we will have to undergo to maximize sales.”

To understand e-commerce ad spending in more detail, let’s look at three different merchants.

  1. A consumer multichannel marketer with annual sales of $100 million has decreased its catalog expenses from $24.5 million in 2006 to $19 million in 2009, and increased its advertising from $500,000 to $6 million. The merchant reduced the number of catalogs sent to prospects and shifted spending to online. How is the company spending that $6 million on e-commerce?

    The bulk of it, $3.7 million, goes to paid search, while $70,000 goes to comparison shopping sites, another $70,000 to affiliate marketing, $30,000 to e-mail marketing and $60,000 to other online expenses.

    The company made its Website more customer-friendly through improved internal search and better navigation; it’s also offering more products and deals online. It expects marketing spend for the next few years will be much higher online than via the catalog as this shift continues.

  2. Now let’s look at the expenditures of a business-to-business multichannel merchant. Keep in mind that the percent of orders by Internet is lower in b-to-b, typically in the 5% to 20% range.

    This business marketer, which does $60 million in annual sales, now has 15% of its sales coming from e-commerce. The company is making the shift from being a catalog-based direct marketer for 20 years to an emerging Internet business.

    It mails 50 catalog editions and other direct marketing mailings per year. The transactional Website uses the catalog photography and copy pretty much as is.

    The company spent $780,000 on e-commerce for 2009, or 8.6% of net sales. This broke down to $300,000 for content and administration, $290,000 for an SaaS platform, and $190,000 for paid search.

    The merchant has big plans for e-commerce spending in 2010: It aims to upgrade its Website to a more robust platform that is SEO-friendly.

    The company also wants to increase activities in paid and natural search, which will require additional people or a contractor. As a result, it may need to reorganize some marketing management resources to save money.

  3. Then there’s a Web pure-play that sells home decor items and does about $7 million in sales annually. This company has a highly seasonal business driven by fourth-quarter sales.

    As a percentage of net sales, marketing expenses, including platforms and marketing/merchandising salaries, are 31% for the first nine months of this year. Because of the fourth-quarter sales, total marketing expenses typically end up in the low 20% of net sales range.

    Paid search is the merchant’s biggest sales driver. The SEO for natural search is done internally; pay-per-click by a contractor. Its affiliate program is contributing 8% of sales.

    Year to date marketing expenses break down to 22.5% for pay-per-click ads, 6.1% for marketing salaries, 1.2% for its pay-per-click contractor and another 1.2% for miscellaneous. This merchant does not have separate marketing and merchandising departments. The Web publishers are responsible for various brands, the product selection and pricing, SEO and e-mails to promote the brand.

    The company in 2010 will implement Magneto, an open-source platform, which it expects will save $60,000 annually. Add-on applications to the system, such as loyalty clubs and drop-ship management, are relatively inexpensive, plus it will make the Website more SEO-friendly.

    The company plans to develop microsites to focus on specific brands or tight categories, giving consumers just the search results they want. The microsites will make it easier for the search engines to focus on their branded categories in a large product assortment.

People capital

Remember that the finest e-commerce technology is useless without the right people. You need folks who can apply the toolsets as marketing tactics and evaluate results, adapt your merchandising and creative practices, and improve SEO.

People with these specialized skills are a scarce commodity. You might need to weigh outsourcing functions vs. the cost and availability of doing some work inhouse.

The need to fuel SEO with continual Website content, write blogs and experiment with social media, among other e-commerce functions, will require people who understand your niche, your products and what your customers want.

Will this increase e-commerce costs? Probably, which brings us back to the importance of clearly identifying your costs and what’s working and driving sales.

Determine the total costs, including key people, toolsets and platforms, as well as the marketing/merchandising resources. Set up analytics to accurately measure demand and response, and allocate costs fairly. Remember that e-commerce spend is different for every marketer and must be tuned to the seasonality of the business and customers.

Curt Barry (cbarry@fcbco.com) is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consultancy.

Sights on SaaS

Software as a Service (SaaS) and outsourcing the development and hosting of Websites is a growing trend. SaaS can be a cost-effective way of gaining new site functionality, reducing operating costs with less reliance on internal IT and accessibility to continuous upgrades. In our experience, SaaS costs range from 1% to 4% of sales.

One $90 million merchant we interviewed could no longer keep up with the IT requirements for its Website. Worse yet, the high-profile brand’s site was hit with a distributed denial of service attack. (DDSA attacks are typically done via an onslaught of external communications requests so the targeted Website can’t respond to legitimate traffic — or it responds so slowly it’s rendered effectively unavailable.)

The merchant’s site was shut down for a week as a result of the DDSA. After recovering, the company quickly outsourced to an SaaS provider with which it could share the necessary hardware and IT infrastructure and grow its site functionality.

Other merchants are turning to SaaS to be ready for the July 1 deadline for complying with the Payment Card Industry Data Security Standards (PCI-DSS). One company we interviewed believes SaaS will give it added financial savings through sharing compliance costs with other firms. Industry studies show that compliance may range from $20,000 to $70,000 for companies with fewer than 1 million transactions. — Curt Barry