Dotcoms dial back on advertising

The drop in expensive marketing has helped cut customer acquisition costs down to $40 in the second quarter, according to the report from industry group Shop.org and the Boston Consulting Group. That's a drop from $71 in the fourth quarter of 1999, and $45 in the first quarter of this year.

But it still takes about three purchases before money spent on customer acquisition is covered, said Kate Delhagen, chairman of Shop.org's committee on Internet Shopping Research.

"With the high cost of acquiring new customers, many online retailers are focusing their efforts on increasing the frequency of purchases from existing customers," she said.

Some of that refocusing comes from a shift in marketing costs. Chastened by the last holiday's television ad free-for-all, retailers have focused on online advertising, which rose to 59 percent on marketing budgets in the second quarter compared with 49 percent in the first quarter.

But that isn't always good news for the sites that run those ads.

Forty percent of the retailers surveyed had renegotiated or cancelled portal deals, the survey found, focusing instead on more targeted ad buys.

Earlier this week, Lehman Brothers analysts Holly Becker expressed concerns about Yahoo! Inc.'s (yhoo) future, saying that the portal giant could face repercussions from reduced ad budgets.

And Amazon.com Inc. (amzn) had to renegotiate deals with several of its dotcom partners earlier this year, forcing it to write off about $110 million in losses from investments and holdings in other companies.

Other cost-cutting measures have been put in place as well. The study found that 29 percent of online retailers had deferred upgrading their sites, and 11 percent had laid off workers.