Cut Operating Costs, Not Marketing

  • by January 25, 2001
Dot-coms seeking to become profitable should focus on cutting operating costs instead of sales and marketing costs, according to a new study released today by Getzler & Company Inc.

Getzler, a New York-based firm specializing in turnarounds and corporate restructuring, surveyed some 190 tech companies, in order to compare the second and third quarter performance of 46 firms that cut marketing costs with 25 firms that cut operations costs.

Their findings? According to Getzler & Company VP Brian Mittman, "While sales growth among the two groups remained approximately the same, there was a dramatic difference in profitability."

Collected data showed that from the second to the third quarter, losses remained constant at firms that cut operations costs (general and administrative expenses, overhead, costs of technology, product and content development for websites).

Notably, losses more than doubled at firms that cut marketing costs. Operations costs included.

"These results indicate that marketing costs remain a far greater driver of profitability for dot-coms than operations costs," Mittman said.

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The study's results were not all positive. "The bottom line is that virtually all dot-coms are still losing money," Mittman said. "The ratio of their losses to sales remains high, and though losses are narrowing, it's not happening fast enough."

Of the 190 firms in the study, only three were profitable on a cash basis. The average firm lost $13.4 million on $22 million in sales during the second quarter, compared to losses of $12.8 million on $25 million in sales during the third quarter. "At that rate of improvement, in the current market environment, most firms won't be around long enough to become profitable," Mittman said.

The study further identified three groups of firms according to their long-term prospects: those with little chance of becoming profitable, those that could become profitable but with severely reduced growth rates, and finally those that could become profitable and continue growing. Companies such as www.priceline.com or www.buy.com, for example, are relatively close to profitability but saw their sales decline in the third quarter.

More likely success stories, according to Mittman, are firms like financial information provider www.multex.com, online real estate broker www.homestore.com, and b2b community operator Vertical Net. Each firm had losses less than 9% of revenue, reduced their loss during the third quarter, and increased their quarterly revenues by at least 20%.

The study also highlighted a number of firms whose financial performance was particularly poor, especially in contrast to traditional firms. "We saw certain firms which had, according to traditional metrics, absurd performance," according to Mittman. "Companies like estamp, www.stamps.com, and quepasa, whose marketing budget alone was as much as seven times their sales levels. Such firms ranked among the worst in their prospects for becomi

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