January 14, 2007

Virtual CEO: Blue Nile

Blue Nile, an online retailer of jewelry, has an interesting set of challenges to face in the future.

During a recent call with analysts to discuss third quarter results, management made several interesting observations.
  • Ad spend as a percentage of revenue is four percent, and has held constant in spite of increases in the cost of online marketing.
  • With brands moving online to advertise, management has decided to not compete by spending more on online advertising. Management states they lowered prices instead. The reduction in prices resulted in twenty-four percent increase in year-to-date net sales. However, gross profit only increased by eleven percent, due to price reductions. Gross profit is about twenty percent of net sales.
  • Management is focusing on increasing conversion on the website, believing this is a key driver of future profitability. Management states that conversion rates are improving, compared with last year.
  • Repeat purchasing skews toward non-engagement merchandise (which has better gross margins than engagement merchandise).
Time for you to play Virtual CEO. If online marketing costs are going to continue to increase, what would you do to grow your business?
  • Follow the updraft in online marketing costs by spending more for the same amount of traffic.
  • Lower prices, and accept the risk of a less-affluent audience. In other words, are you willing to trade your target audience for one that is less affluent, as a way of combating increased online marketing expenses?
  • Do you have a different strategy you would employ?
Online pureplay retailers face the potential for long-term profitability decreases as the cost of online marketing increases. How would you strategically attack this problem? What marketing tactics would you employ to drive repeat business (which yields a higher gross profit)?