Unleashing the Ideavirus

Unleashing the Ideavirus
28
 www.ideavirus.com
The Traffic Imperative: Why Sites Fail
A site without traffic doesn’t exist.
According to Forrester Research, only 20% of 50 leading online retailers expect to turn a
profit this year. Just 18% more expect to be profitable next year. It’s becoming increasingly
obvious that many of these sites will 
never
turn a profit, and that they’re hoping to last long
enough to be acquired or sell their stock.
A recent McKinsey and Co. study found that the vast majority of online retailers are not
only unprofitable, they’re actually losing money on every sale. Without even computing the
cost of advertising and clicks, these sites have discounted their prices so significantly that the
contribution margin from each sale is negative. The average online drugstore, for example,
loses $16.42 on each and every sale, before computing the cost of traffic.
Why? Many of these sites are confusing low prices with an effective customer acquisition
tool. There’s probably no way that’s less effective and more costly than cutting your prices to
the point where you lose money on each sale (for Amazon naysayers—they actually make a
profit of about $5 on the average book order).
Add to this mess the obscene cost of customer acquisition—estimated by the Boston
Consulting Group to be more than $80 a visitor (that’s for 
visitors,
not even customers) for
most online merchants. Now you can see the huge hurdle these sites are going to have to
cross in order to be profitable.
This problem isn’t unique to the online world, of course. When I was enrolled at Tufts
University in 1980, there were two homemade ice cream stores within two miles of campus.
One was Joey’s, which made a terrific product (they used Hydrox cookies instead of Oreos,
by the way, so you could avoid the animal fat if you wanted) and there was never, ever a line.

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