E-tailing - can you afford it?

How much should you spend on an e-commerce site? asks David Bicknell

How much should you spend on an e-commerce site? asks David Bicknell

The recent revelation from US toystore Toys R US that its online operation toysrus.com had wiped around £13m from its second quarter profits has shown how awkwardly embracing the Net can seriously damage your business.

To date, Toys R Us' online store has produced half year losses of $22m, enough to make any self-respecting bricks and mortar company swallow hard.

In an atmosphere where many dotcoms are struggling to find further sources of funding, traditional company spin-offs like Toys R Us, even though haemorrhaging cash, should be in the pound seats - providing top level management can continue to face the red ink.

Even Toys R US has had to take action to prevent further losses as the year grinds on towards a Christmas holiday season which promises to make or break many online retailers.

It has struck a deal with Amazon whereby the online book pioneer will provide the systems and fulfilment expertise, and Toys R Us will provide the toys expertise for a new joint venture.

So where is all the money going? According to research group Forrester, which spoke with a string of executives in charge of over $200m of budget resources, around 13% spent more than $2m to launch their sites, while 17% last year expected to splash more than $20m on their sites.

Much of the budget so far has gone on marketing, accounting in many cases for upto 39% of the total. Much of that has gone on ensuring the site is known around the globe, but in future the budget is more likely to be spent on a redesign, and crucially, customer service.

Forrester has suggested that expenditure in setting up an online store, whether as a dotcom or as a traditional bricks and mortar company, fits into five major expense components:

  • Core commerce functionality i.e. hardware, software and staff costs

  • Content - pictures, knowledge, information and advice

  • Guided selling - the consultative and promotional sales process in buying online

  • Marketing and business development - promotional costs such as online and offline advertising, portal deals, and sponsorship

  • Presale customer service - offering customer service to field queries and close sales

    But typically, bricks and mortar companies' online operations should benefit from building on existing "brand equity" and can achieve similar site awareness as dotcoms with 10% of their media spend. They can add URLs to existing advertising campaigns, and get portals to offer lower rates to boost their own malls' credibility.

    Traditional retailers can also benefit from putting manufacturers' product shots online, using sales guides to populate selling engines, and having in-store clerks to field sales inquiries. In all, such measures can save around 15% of costs in setting up the site, and 30% afterwards.

    But it is not all good news. Over the next three years retail site costs will continue to be a "moving target".

    Technology requirements will rise as total costs fall. Part of that will be the necessity to make nonstop e-commerce a prerequisite, with a 99.999% level of service availability a minimum.

    Content spending will rise in step with customer expectations. Improved bandwidth is likely to drive demand for 3D effects, and globalisation will mean extra costs for the localisation of content i.e. local languages

    How do you counter these costs?

    The first method is probably to avoid the "bleeding edge". That means steering clear of adding bells and whistles for their own sake, rather than adding requisite meaningful differentiation.

    The second is to get the board on your side, since the cost of an online storefront can generate huge revenues, even if the costs in setting up a site seem equally huge.

    For example, although Barnesandnoble.com, the online bookstore, spent over $78m over the last two years on its site, it generated $62m in revenues, around 20 times that of its traditional High St sites.

    Finally, Forrester suggests, for cash-strapped sites, now is the time to be more thrifty, conserving marketing budgets by marketing through aggregators such as Yahoo, and partnering with sites offering complementary products to the same consumer segments.

    Whatever they do, online retailers will find that setting up a Web store and keeping it up and running is going to ask some serious questions of the accountants, and the nerve of the board executives.

    One site told Forrester, "Marketing is our number one expenditure, but we're falling behind in site functionality. Our rivals' site is kicking our butt, and we can't compete with that kind of functionality. Putting money into media is good, but we really need to invest in a site redesign.

    Yet, despite the supposed advantages of being a bricks and mortar-derived site, sometimes getting that culture transposed to the web is not an easy thing to do.

    According to one executive whose site competes directly with Toys R Us, Toys R Us' arrangement with Amazon has allowed it to maintain a presence on line for their existing customers and at the same time return to a business model that they are much more comfortable with.

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