Dot-coms paring down ad spending ahead of holidays

Many Internet companies are dropping their big-budget advertising campaigns this holiday season, instead focusing on online and direct marketing tactics to try to drive sales.

Stefanie Olsen Staff writer, CNET News
Stefanie Olsen covers technology and science.
Stefanie Olsen
7 min read
Dot-coms are mostly dropping their big-budget, showy advertising campaigns this holiday season, focusing instead on online and direct marketing to drive sales, industry executives say.

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Mixed news for online advertising
Charles Buchwalter, vice president, AdRelevance

Last year, flush with venture capital largess or public offering windfalls, Internet retailers spent lavishly on brand campaigns through television, radio, billboards and print. But this year, under extreme market pressures, online retailers have become penny-wise and focused on reaching sure-fire customers already savvy to shopping via the Web.

"This year, the mood is one of accountability and conservatism," said Laura Mitrovich, program manager in Internet market strategies at The Yankee Group.

Online retailers must "bring in hard cash this holiday season. Whatever online advertising dot-coms do this season, it will have to justify itself," Mitrovich said.

This shift reflects an overall emphasis in the industry on a clear path to profitability and more levelheaded business strategies. Since April, when the stock market for Internet companies took a nosedive, many dot-coms have had to re-evaluate their business models to survive. And many e-tailers that made a splash last holiday season have buckled under the pressure, including Eve.com, Boo.com and Miadora.com.

Because the market has thinned, the volume of ads across all media this holiday season will be reduced, analysts say. And because the season is often a make-it-or-break-it time for retailers, those ringing in online sales will be fiercely competing for customers. Most plan to reach consumers through targeted marketing, including in-house email lists, online promotions and advertising, and direct mail.

"You're going to see online advertising is extremely targeted this year because every cent has to count; every dime has to be applied with the anticipation that it will generate a sale," Mitrovich said.

Jeanette McClennan, president of New York-based marketing services company Ogilvy Interactive, said that this year, "it's less about building awareness and more about building transactions."

"People are going to demand that their ad dollars work harder across the board," said McClennan, whose company represents companies such as Sears.com and Johnson & Johnson. "There's not necessarily less spending, but it's more focused spending."

Internet businesses spent about $1.8 billion on offline advertising last holiday season, including outdoor advertising, radio, magazines, newspapers and cable TV, according to Competitive Media Reporting, a group that tracks media spending. Magazines and national TV spots took up much of the spending.

Amazon likely to spend less
Even Internet bellwether Amazon.com is expected to spend less money this season.

"Last year, we think Amazon spent about $80 million on advertising in the fourth quarter," said Tom Courtney, a Banc of America Securities analyst, who noted that Amazon does not break out its advertising expenses from its quarterly figures. "This year, we think they'll spend about $50 million."

Holiday e-commerce report
Last year, specialty gift e-tailer RedEnvelope blanketed cities with billboards of its signature red gift box, trying to build a brand name for itself. This year, the company is getting personal by sending millions of catalogs to homes.

"We want to take the awareness (built last year) and turn that into transactions this year," said Martin McClanan, chief executive of San Francisco-based RedEnvelope. "What we're doing now is focusing on what we call action-oriented advertising that drives transactions."

After launching its catalog last February, the company found that first-time customers were more apt to order products through the catalog. Once they were comfortable, they would switch to online ordering, McClanan said.

RedEnvelope is pulling back from TV and billboard advertising and is even curbing online spending, allocating funds only to portal partners such as America Online, MSN and Yahoo. Hallmark.com, an online partner, will also promote the site.

McClanan said TV or billboard ads are 10 times less effective than direct or online marketing when it comes to customer acquisition costs.

"You'll see a lot of traffic from TV advertising, and you'll create brand awareness, but you don't see great transactions proportionate to your spending," McClanan said.

Not ready for prime time
Analysts say that only the most financially stable sites will advertise on prime-time television, because it is the most expensive media buy.

RedEnvelope is devoting only 20 percent of its marketing budget to brand advertising, such as print ads in Vanity Fair. The remaining 80 percent is trained on transaction-driving marketing.

"We've reduced marketing expenditures by about half and are expecting sales to improve by 400 percent or 500 percent," McClanan said.

Online ad spending is expected to rise in the fourth quarter, but industry watchers say the level of growth will pale in comparison with previous years. Last year, online advertising reached $1.7 billion during the fourth quarter and accounted for 37 percent of total revenues for the year, according to the Internet Advertising Bureau (IAB) and PricewaterhouseCoopers.

Internet advertising is expected to reach a total of $8 billion this year--up substantially from $4.6 billion last year. Christian Kugel, research manager for marketing company Starcom IP, said online ad spending would reach $2.8 billion, or a 65 percent year-over-year growth, in the fourth quarter.

By comparison, spending on Internet ads grew 160 percent during the fourth quarter of 1999, compared with the same period a year earlier, according to IAB figures.

While many forecasts for the fourth quarter are indefinite, analysts have predicted how the money will be spent.

Ad budgets on the Web will be concentrated on a few targeted areas, including keyword searches and shopping categories on highly trafficked portals.

The strategy bodes well for top-tier sites such as Yahoo and AOL that have been hammered in the stock market recently over concerns about declining ad spending. While many traditional retailers have increasingly taken to Web advertising, filling in the gaps where dot-coms die off, investors are concerned that the growth of online advertising has not risen as steeply as in previous years, partly because of technology constraints.

Email promotions all the rage
The biggest buzz seems to surround email promotions. Advertisers are going to tap customers through email because it's inexpensive and personal.

"You'll see a lot of online promotions this year because it's so cheap," said Sam Ewen, president of Eisnor Interactive. "Last year we saw a lot of extravagance because everyone had a lot of money. Dot-coms don't have the money anymore."

Last year, Eisnor engineered marketing campaigns for several dot-coms, including DealTime.com and Staples.com, during the holidays, but this year its main client is HotJobs.com. The employment site is an anomaly this year, boosting its overall marketing budget and including in the mix a $2.4 million spot during the upcoming Super Bowl in January.

Holiday season 1999 companies shelled out millions to coax mall-goers into shopping online, and many online retailers became victims of their own success, failing to fulfill orders in time for the holiday or running out of inventory.

"This year, none of the dot-coms have the buckets of VC cash to offer things like free shipping and free products and discounts," said Jim Nail, an advertising analyst at Forrester Research, which predicts that most online shoppers this year will have bought online before.

And companies are determined not to make the same mistakes.

Upscale e-tailer Ashford.com spent $14 million on marketing last holiday season, and this year it plans to cut that budget by $3 million to $4 million. To do this, it is moving away from TV, billboard and print advertising, and in its place, it will use targeted online advertising and email promotions.

What the company is not leaving out of the lineup is free shipping on all orders, a big draw from last year. Starting Wednesday, the company is promising free next-day delivery on goods in stock ordered by 5 p.m. or it will send the customer 25 roses from MarthaStewart.com. But it is not planning on delivering too many of those bouquets, so costs should stay down, Ashford.com chief executive Kenneth Kurtzman said.

Traditional retailers will also make more use of the bricks to promote the clicks. Unlike in years past, when old-line retailers feared online sales would cannibalize in-store sales, they are now embracing their online units by adding a Web address to every catalog, shopping bag and advertisement.

Retailers such as Victoria's Secret and Lands' End, for example, are sending customers emails that link to featured products or sales on the Web site to drive transactions. Walmart.com is planning a conservative approach to the Web this year, concentrating promotions on AOL and "big placement in stores," according to chief executive Jeanne Jackson.

"We'll let customers know that there is a bigger assortment online. We don't have to spend a lot of money on creating awareness," Jackson said.

CheckOut.com also is planning only some targeted advertising online. But the company will pick up high-reach promotions through its parent company, Wherehouse Music.

Nevertheless, the heyday of dot-com ad spending, when companies dropping $1 million for 30 seconds of ads during the Super Bowl seemed normal, is gone.

"With some dot-coms it's the last hurrah. Some are counting on (the holidays) to push them along in the future and some aren't going to make it," said Mark Stephens, media director for Lot21, an online marketing agency.

News.com's Dawn Kawamoto contributed to this report.