(sa/art) "the Cost of Branding".....
Excerpts from this article are presented as counterpoints to the two preceding articles. these exceprts demonstrate how mass media oriented interrupt marketing are ineffective and expensive methods to obtain customers and establish "brand" recognition.
redherring.com
"CAN INTERNET COMPANIES MAKE MONEY?"
By David Simons
Red Herring Online
November 16, 1998
"Will Internet companies ever make money?
That's the question of the '90s, and one that cuts to the issue of how much it costs to buy branding and customer loyalty....
....But holiday shopping alone does not automatically guarantee a happy bottom line. In fact, according to our research, aggressive spending on marketing -- and we mean big money -- could make the Internet stocks more ho-hum than ho-ho-ho.
Mega-marketing trend
It's not news that many Internet companies' lack of profit is due to marketing spending. However, the trends of spending in search of branding reveal that the hole has been getting deeper....
The table below shows marketing spending as a percentage of gross margin for prominent electronic retailers, or e-tailers, over the past four quarters. (Gross margin is revenue less cost of goods sold -- such as payments to wholesalers for books, CDs, software, etc.)
MARKETING EXPENSE AS % OF GROSS PROFIT
quarter ending.. 9/98 ..6/98... 3/98... 12/97
Amazon......... 107% ...101%... 101%... 125%
Beyond.... .....533%... 350% ...210% ...135%
CDNow......... 448%... 450% ...587% ...527%
OnSale......... 105%... 102%... 128% ....70%
As any good MBA should know, these numbers suggest a classic blunder of over-expansion in name of market share. Yet the stock market has elevated such spending to the essential business model of the Internet -- and the more headlong, the better.
...In fact, implicit in today's notion of establishing an Internet brand and gaining market share is that, once gained, the branding and customer loyalty have permanence, as if bought off the shelf. But nobody's proven that consumer behavior on the Internet won't require perpetual nurturing and nourishment, and therefore, perpetually outsized marketing budgets as a percentage of gross margins." |
