E-Performance: The Path to Rational Exuberance

Article excerpt

Successful e-commerce companies are following tried-and-true principles from the brick-and-mortar world.

Although many e-commerce companies collect cost and usage data about their World Wide Web sites, few of them understand in any detail how well such information measures their sites' performance or how this performance compares with that of competing sites. Still fewer companies know if their sites are becoming more effective over time.

That didn't matter very much as long as venture capitalists and the capital markets were willing to throw money at dot-coms. But since last spring's crash, investors have been insisting, if not on profits, at least on objective measures of a site's success in attracting, converting, and retaining visitors.

We have analyzed 250,000 data points describing the behavior of on-line visitors to the sites of hundreds of companies, employing many business models, during the 18-month period from January 1999 to June 2000. [1] This information has helped us achieve a new level of rigor in evaluating the performance of e-businesses. At least six months before the collapse, the data showed that Internet companies suffered from a kind of fatal attraction: they were successful at luring visitors to their sites but not at getting these visitors to buy or at turning occasional buyers into frequent ones. Indeed, the more visitors the sites drew, the more money they lost.

Yet by the time investors finally lost confidence, the tide had actually begun to turn; in fact, the era of business-to-consumer (B2C) profitability is now around the corner. A small but solid group of leaders has been profitably converting visitors into customers and getting them to return.

Fatal attraction

Most measures of e-performance track variations in traffic--page views, advertising impressions served, unique users, and so on. But the foundation of long-term profitability is lifetime customer value: the revenue customers generate over their lives, less the cost of acquiring, converting, and retaining them (see sidebar "The e-performance scorecard").

We studied consumer behavior during two consecutive periods--the first and second halves of 1999--and results have begun to come in for the first half of 2000. In all, we tracked more than 650 million visitors to eight kinds of Web site--portals and communities such as Yahoo! (see sidebar "Community values," on the next page), as well as sites for news and general content, specialized content, general retailing, specialty retailing, retail services, new marketplaces, and financial services. These visitors made 2.7 billion visits to the sites, conducted 27 million transactions, and (in 1999) paid $4 billion to 224 companies based in North America, Europe, and Latin America.

Our first discovery--no surprise today--was that the intense early focus of e-businesses on attracting the public to their sites went pretty well universally unrewarded: almost none of the companies that lavished large sums on e-marketing campaigns achieved above-average visitor growth or conversion rates. Businesses that failed to do so included Boo.com (in the United Kingdom), Pets.com (despite the ubiquity of its TV commercials), and Living.com, which closed after burning through more than $100 million. We found on-line brokerages that spent upward of $50 million a quarter, and as much as $25 million on launch campaigns, when total revenues were unlikely to pass $30 million. The market worked Out these truths in April 2000, but the numbers had long been plain to see.

Data from the first half of 1999 suggested that fewer than 4.5 percent of site visits resulted in sales and that fewer than 10 percent of visitors who made initial purchases made later ones. By the second half of 1999, consumer choices had proliferated so much that only 2.5 percent of site visits resulted in sales. An increase in repeat purchasing, to 18 percent, seemed impressive, but the net effect was only to undo the deterioration in the conversion rate. …