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)?


  1. Anonymous12:50 PM

    Have they optimized organic search? Have they tested Paid Search using thousands of more obscure key word phrases (4 and 5 words) that (1) can be purchase competitively and (2) generally have a higher conversion rate? Are they segementing their email file based on customer purchase behavior and sending emails that resonant with previous buyers? Are they delighting their current buyers with first time "welcome gifts" and bounceback offers geared to stimulating second purchases? Just a few thoughts...what do you think?

  2. Don't know if they are doing those things or not. All good ideas, however!

    Who do you think does a good job of sending emails that resonate with previous buyers?

    Thanks for the excellent comments!

  3. Anonymous5:48 AM

    We segment our elist by ten different product clusters (e.g. leather goods, organizational tools) and we've seen a significant lift as opposed to general-purpose emails. We've also recently started sending out email bouncebacks to recent buyers with amazing results. The challenge facing us is to further automate the building of emails so that we can take full advantage of segmentation. Currently, building emails with all their links is extremely labor intensive. Hope this helps.

  4. It's funny how all those techniques that the catalog folks figured out decades ago apply to e-mail too.

    Good job!!

  5. I disagree that there is currently inflation within the online marketplace.
    There is significant inflation within generic terms in the paid for placement search, due to people bidding irrationally on terms relevant to products but not relevant to purchase.
    There should be room to improve natural search listings, but this should not be the limit to external marketing.
    Search should focus solely on bringing in converting traffic, save the money you will be wasting on generic terms and spend it elsewhere.
    Increasing the channels to market should be the strategy - partnership deals with sites should looked at. Take the Blue Nile shop to different areas. Shopfronts do not have to be restricted to affiliate deals, they can be expanded to key partners identified by your company or agencies attached.

    Email marketing to existing customer base makes tons of sense, but is not going to generate long term growth. You will always leak customers, and activity must be run in order to recruit new ones.

  6. Sounds like you're advocating a stratgy to be more efficient with advertising, as a way to combat cost increases.


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