Is The Formula For Success Changing?

Fred Wilson points out some interesting comments from Howard Morgan, and adds some of his own insight:

Howard showed us the basic economic equation for online commerce, which is:

RPC - CPC = Profit

RPC is revenue per click
CPC is cost per click

The Comscore data seems to indicate that this formula may no longer hold because two big things are happening this holiday season that portend big changes in ecommerce and search.

Trend 1 is the emergence (finally) of the multi-channel retailer (retail, catalog, online, etc) as a major player in online commerce. Walmart, Target, BestBuy, and others are having huge holiday seasons this year. They finally got the web right!

Trend 2 is the latency of online searches (the searcher often buys as long as 30-60 days after doing the search) and the fact that over 90% of searchers actually make the purchase offline.

If revenue per click is recognized in the Best Buy store in the mall three weeks later, then cost per click is going to go up and may go way past immediate online revenue per click.

This portends well for Google, Yahoo!, etc and very well for the multi-channel retailers. It's going to be a challenge for the single channel online retailers.

While I have no doubt about Fred's comments in the short run, I think there is an important 'future trend' to keep in mind: a large portion of the long sales cycles and offline buying occur because online commerce still isn't addressing the complete needs of shoppers. In other words I think a lot more of these sales will happen faster, and stay online, once some more progress is made in the quality of the online shopping experience.

There are lots of reasons why people delay purchases - and many of the won't every go away. But a huge number of purchases are delayed because the customer (consumer, prospect, humaniod, what-every) isn't fully satisfied in terms of product or comparative information, pricing or terms, shipping or delivery issues, etc.

It's been a long time since the general shopping experience at online stores improved. The technology base of most merchants, and their back-office, has received a lot of attention over the past three-four years. But at all but a few stores shoppers still see a picture, price, and paragraph - just like they did back when mail order catalogs were high tech. The result is that buyers are essentialy forced to search out 'pre-sales' information in forums, on affinity sites, in online reviews, and by emailing friends - all activities that pull them out of the sales cycle and often lead them to delaying the purchase.

As merchants increasingly learn to measure what's going on at their sites, and then start figuring out the reasons behind the still massive abandonment rates and generally abysmal conversion rates they live with, we're eventually going to see that if they really educate and sell online, they'll get the sales online.

Posted by Craig Danuloff at December 18, 2004 7:41 PM