-Caveat Lector-
>From IntellectualCapital.CoM
> You've Got to Spend Money to Make Money
> by Daniel Gross
> Thursday, June 10, 1999
> Comments: 11 posts
> Internet enthusiasts routinely proclaim that
> the explosion of the medium betokens the advent of a new era and a new
> economy -- one in which sky-high stock valuations are supported by
> rosy prospects, inflation is nonexistent, and profits do not seem to
> matter.
>
> Few of the dozens of Internet companies that have gone public in the
> last several years have turned a profit. And few investors seem to
> care. Amazon.com has racked up an $18 billion market capitalization
> despite a string of losses that would make the hapless Los Angeles
> Clippers proud.
>
> Cyber-entrepreneurs dismiss concerns about profits as fuddy-duddy,
> old-time thinking. Indeed, analysts, investors and venture capitalists
> have embraced losses and elevated them to a virtue. Companies
> operating in cyberspace do not have to invest in bricks and mortar, or
> inventory, or vast work forces, or raw materials, the reasoning goes.
> Instead, they should spend their dollars on marketing: advertising,
> direct mail, sports sponsorships, etc.
>
> The goal is to build market share, capture surfing eyeballs, and
> establish a firm presence in the hearts and minds of consumers. Then,
> and only then, the argument goes, can Internet firms generate enough
> business to gain scale, attract advertisers and strategic partners,
> and, one far-off day in the 21st century, turn a profit.
>
> As Amazon.com Chief Executive Officer Jeff Bezos put it on CNBC on
> June 8: "We believe it would be a terrible management mistake to be
> profitable now during this critical category formation time."
>
> Less bang for the buck
>
> So far, Amazon.com has avoided this terrible mistake. Last year, it
> lost $125 million on revenue of $610 million. It also spent
> prodigiously on promotions. Sales and marketing costs for 1998 were
> $133 million -- i.e. nearly the sum total of its loss.
>
> A check at a few other Internet high-fliers shows they are assiduously
> following Amazon.com’s example of avoiding profits and spending
> heavily on marketing. Online financial magazine theStreet.com (1998
> loss: $16 million), last year spent twice its revenues on sales and
> marketing. iVillage, the women’s content site, spent $10.88 million
> last quarter on sales and marketing; its total revenues were $6.4
> million. In the fiscal year that ended last March, retailer eToys had
> net sales of $30 million, of which it spent $20 million on marketing
> and sales.
>
> <Picture: Branding and marketing... is it worth it?>
> Branding and marketing...
> is it worth it?
> But that is just the beginning. "We anticipate our losses will
> increase significantly from current levels because we expect to incur
> additional costs and expenses related to brand development, marketing
> and other promotional activities," eToys’ recent prospectus noted.
>
> Investors seemingly have internalized the logic of spending heavily on
> marketing to build name recognition and attract customers. But there
> are ways of measuring the effectiveness of marketing efforts. And a
> few years into the boom, it is clear that not all Internet companies
> have been successful.
>
> In its May 31 issue, Business Week gauged the marketing efficiency of
> 15 leading Internet firms by dividing their revenues by marketing
> expenses. It found some winners. America Online reeled in $6.95 for
> every $1 it spent on marketing, for example. But other Internet
> companies consumed marketing fuel more like a Humvee than a Honda.
> TheGlobe.com brought in just 59 cents for every dollar spent on
> marketing, iVillage raked in 53 cents, and theStreet.com pulled in
> just 46 cents for every marketing dollar spent.
>
> Worse, taken as a whole, the 15 companies surveyed proved less
> efficient in 1998 than in 1997; the average amount returned in sales
> per marketing dollar fell 20%, from $3.37 to $2.70. In other words, in
> a year when e-commerce caught on like wildfire, these 15 leading
> Internet firms got less bang for the buck.
>
> The old rules still apply
>
> To a degree, such a result is not surprising. Each week, dozens of new
> souped-up Web sites compete for the ultimately finite number of
> dollars consumers and businesses spend in cyberspace each year. And
> therein lies the rub. Marketing is not an activity companies undertake
> only when they are in their start-up phase. Rather, it is as important
> for mature butterflies as it is for larvae.
>
> Advertising Age’s list of the 100 top U.S. advertising spenders is
> chock-a-block with household names whose products have long since
> entered the commercial lingua franca. General Motors, the biggest
> spender, spent $3.08 billion in advertising last year in the U.S.
> alone. Others spending more than $1 billion on domestic advertising
> include such venerable brands as Disney (No. 7); Sears (No. 6) and
> Pepsi (No. 8). Those figures do not even include other sales,
> marketing and promotional expenses.
>
> With each passing year, market leaders like GM, AT&T and IBM face
> pressure to spend ever-greater sums on marketing. The only thing worse
> than not having market share is losing market share. Analysts tally
> the quarterly case shipments of Pepsi and Coke the way Rotisserie
> league managers obsessively scan baseball box scores and are quick to
> highlight any slippage.
>
> The difference between the old and the new companies is that dinosaurs
> like Sears and Ford bring in enough revenue from operations to fuel
> their marketing programs, to cover employee salaries and other costs
> -- and still pay dividends to shareholders. Amazon.com, according to
> Business Week, last year brought in $4.59 for every marketing dollar.
> But those impressive revenues did not come close to meeting the
> company’s costs. And its sales and marketing expenses are unlikely to
> decline over time.
>
> Once Amazon.com establishes itself as the dominant bookseller, CD
> store, drugstore, auctioneer and toy seller in the Internet, will it
> suddenly stop spending money on marketing and advertising? Now that
> would be a "terrible management mistake."
>
> Marketing is an essential vital function of any business, as crucial
> to a commercial enterprise as breathing is to a human organism. To
> write such spending off as an anomaly or a function of youth, as
> Internet companies do, is disingenuous and self-deceiving. It is like
> a bankrupt person standing before a group of his creditors and arguing
> that if he did not have to pay that $40,000 in rent each year, he
> would subsist just fine on a $30,000 annual salary.
>
> Daniel Gross is a freelance writer based in New York and the author of
> Forbes' Greatest Business Stories (Wiley, 1996). He is a regular
> commentator for IntellectualCapital.com. He can be reached at
> [EMAIL PROTECTED]
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