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November 10, 1999 Event
1999 Holiday Season: The Branding Blitzkrieg Arrives As 1999 draws to a close, e-commerce players poised to become leaders in the new millennium are readying to launch a branding blitzkrieg upon consumer America. Established players such as Amazon, E*Trade, and CNET will find dollar-for-dollar marketing muscle exerted by brand-hungry contenders such as eToys, TD Waterhouse, and AltaVista as they cover our buses, adorn the sides of buildings, and blanket the Web. With fierce competition for e-commerce dollars, product prices online will plunge below breakeven, viral marketing schemes will plague email systems, and give-aways will transfer millions of dollars directly from investor bank accounts into contest winners' pockets. Yet quarter after quarter, losses seem to widen for even the most established players as they continue to pour money into building their brands. What would happen if e-commerce players such as Amazon, eBay, and CDNow halted their marketing spend? Would their revenues flatten? Could competitors continue to advertise and usurp marketshare away from them? With a seemingly bottomless pit of investment dollars available to even longshot .com competitors, none of these larger companies have dared explain the consequences of such action. This holiday season is thus poised to be a valuable lesson that may help investors learn whether the promise of higher Internet margins will be gutted by the reality of perpetually higher marketing expenses. Net firms locked in costly marketing race
Key Learnings
BATTLE OF THE BRANDS
While most dot-coms agree it is cheaper to acquire customers now than in the future, they are pouring record-breaking marketing dollars into media campaigns to build their brand. It is not clear whether a savvy ad campaign will be enough, however, as the competitive B2B and B2C landscapes are becoming better defined. While brand recognition can help companies acquire first-time users, brand recognition plays a diminished role in customer retention. Not surprisingly, the dot-com ad campaigns flooding airwaves this holiday season focus more on customer acquisition than retention. The harsh reality is that marketing campaigns are not truly successful if new users are not converted to repeat customers.
THE ADVERTISING ARMS RACE
Like the arms race of the 80s, companies are faced with two choices: spend as much as your competitor or lose. This circular spending pattern has changed the assumptions that go into brand building budgets. Spending $50-100 million on brand building in 1998 would have seemed outrageous, but in 1999 this figure has become the benchmark for customer-hungry dot-coms. It is clear that dot-coms are spending at an unsustainable rate as a percentage of their budgets. Yet as sectors mature, individual companies will spend less as a percentage of their revenues and their user base will be orders of magnitude larger than it is today.
OFFLINE VS. ONLINE: CLICK AND MORTAR
Brick-and-mortar brands lack the reputation that online brands have built for themselves because they lack experience selling directly to consumers. Brands like Dell have had tremendous success online because they were not constrained by a retail shop mentality (nor distribution partners). By the end of 2000, many offline businesses will threaten or overthrow dot-com leaders as they build the business structure necessary to carry their large customer base online (e.g., Toysrus.com.) Ironically, online entities are already looking offline to build their brands. Traditional media has become the favorite strategy for online company brand builders as they look to intercept buyers before they sit down at their computer.
THE ENVELOPE PLEASE
The winning brands at the end of 1998 are not necessarily the winning brands of this year. Many believe the same will be true next year. CDNow was one of the early music e-commerce sites. As we enter the 1999 Christmas season, more people seem to have Amazon on their mind for music. The difference: Amazon matched CDNow's user experience and continued to spend on its brand. On the flip side, it is not unthinkable that Amazon itself could lose its edge in books if it does not effectively transition its brand from books to a commerce supersite. Thus, as other commerce players begin to match the user experience of industry leaders, effective branding will become a strategic advantage in winning the war.
QUOTES OF THE NIGHT
"There are two types of companies: those that have effective marketing and those that have not started marketing yet."
"In the 80s it was synergy -- in the 90s the word is brand."