March 17, 2000, Volume 1, Number 11

The Marketing of a Net Company
By Bindu Nair

One of the costs involved in starting a new business is establishing identity and attracting customers. Nowhere has this been more evident lately than in the new business-to-consumer ventures created by the Internet. E-commerce companies have received extensive press coverage regarding their advertising spending in relation to earnings. In this look at the trend, ICSC sought to answer two questions: Where are Internet companies spending their advertising dollars? What proportion of an Internet retailer's net sales is spent on sales-and-marketing expenditures?

Using data from Competitive Media Reporting, The Industry Standard reported that for the period January to November 1999, Internet companies spent $4.2 billion in advertising.¹ The total included both Internet companies that provide services (such as job placement) as well as goods. Almost $1.7 billion (just over 40% of the total) was spent advertising on the Internet. (See Figure 1.) But the remaining $2.5 billion—almost 60% of the total sum— was spent advertising on offline channels. Network television led among the offline outlets ($556.8 million), followed by magazines ($495.9 million), cable television ($396.3 million), spot television ($325.7 million), national radio ($248.4 million) and national newspapers ($250.7 million). The remaining $212.5 million was spent on channels such as newspapers (other than national), syndication, network radio and Sunday magazines.

Figure 1

In order to get a sense of what ad spending represented to individual business-to-consumer Internet retailers, ICSC identified the marketing and sales (MS) expenditures of four companies through their filings with the Securities and Exchange Commission (SEC). MS also includes expenditures for items other than strictly advertising—such as payroll for staff involved in marketing—but it can still provide a broad picture. The pure-play companies were selected because of the attention they receive in the press on a variety of Internet issues. The findings are listed in Table 1. The data for the full calendar year 1999 are not yet available for all the companies and as a result, the most recent filing was used.

Table 1

Company	Sales	Marketing and Sales Expense	For the year to date ending:	Marketing Expense as % of Sales
Amazon	$963,797,000	$233,222,000	9/30/99	24.2%
Etoys	$21,281,000	$31,585,000	9/30/99*	148.4%
CD Now	$94,082,348	$63,817,969	9/30/99	67.8%
Pets Com**	$619,000	$11,815,000	9/30/99**	1908.7%

* Period covered is 3/30/99 to 9/30/99
** Period covered is 2/17/99 (company's inception) to 9/30/99
Source: company 10Q filings with the SEC

Clearly, the amount of money spent on marketing and sales comprises a substantial portion of these Internet companies' sales earnings. In two cases, MS expenditure exceeded net sales. In the most dramatic example here, Pets Com spent close to $12 million on marketing—or almost twenty times more than it earned in sales. During the same six-month period, Pets Com posted a net loss of over $19 million. In its filing, Pets Com identified itself as a new company—it began selling in February 1999 and is the "youngest" of the four companies presented here. The company projected net losses for the next four years in part because of its focus on establishing the brand "quickly" in an effort to "build a critical mass of customers". EToys—which began selling products in October 1997—also reported marketing expenses in excess of its net sales.

It is evident that Internet companies place a premium on advertising and marketing. The expenditures are made in order to establish a brand identity. The question remains as to how long some these companies can survive with expenses that outpace sales. The small amount of "historical" evidence suggests that the MS/sales ratio can/does decrease for Internet ventures that survive. The MS/sales ratio for Amazon—which began in July 1994—has been declining from a high of 39.1% in 1995 (although it's ratio did rise from 21.8% in 1998 to the 1999 value). It will certainly be interesting to observe how the advertising spending and MS/sales ratio of all of these Web companies change over time.

  ¹ "Marketing Spotlight: Dot-Com Ad Spending Outpaces Ad Revenue." The Industry Standard, March 13, 2000 issue.