Nov 32008

Online Retail Sales Stats: Consumers Buying But Spending Less

In September, we reported online sales were holding steady across our client base. As November begins, the situation has become bleaker. Across much of our client base, we see significant signs of the economic slowdown.

For background, our agency manages search for over 100 clients, mostly online retailers, mostly B2C. Our clients spend about $100 million combined on paid search clicks annually.

Here are total PPC-driven sales, aggregated across all our clients, from Monday, June 2, 2008 through Sunday, October 26, 2008.

That is a scary trend. We are seven weeks from Christmas. In a normal year, online retail sales should be ramping up heading into the holiday season.

Comparing week 23 (Mon 6/2/08 to Sun 6/8/08) to week 43 (Mon 10/27/08 to Sun 10/26/08), our aggregate client PPC-driven sales are down by almost 20%.

Considering clients we have served for 18 months, where we can compare fall 2008 to fall 2007 sales on a same-client apples-to-apples basis, aggregate 2008 weekly PPC-driven sales fell behind 2007 sales midway through September.

The aggregate sales decline is primarily due to a decrease in average order size (AOV). Across our clients in aggregate, AOV has dropped by almost a third, from $200 to $140.

The prior graph places more weight on our largest clients, for they contribute the largest volume of sales and orders to the average. The next graph presents average AOV weighting each client equally. The trend is spikier, because smaller clients have more volatile average order sizes, but this 'typical-client' perspective also shows AOV decline.

We segmented our clients into three bins by their YTD average order size: sub $100, $100-$200, and $200+. We represent these by thin, medium, and thick lines, respectively.

The October decline in sales and AOV was most pronounced for clients in the high AOV bin.

While aggregate sales have slowed across our client base, the number of PPC-driven orders has held relatively steady.

In normal times, we would expect that order curve to be up, not flat, seven weeks from Christmas.

A critical metric for many retailers for buying paid search advertising is sales per click (SPC). SPC captures both site conversion (the chance a visitor makes an order) and AOV (the average size of an order). For retailers who bid to a target economic efficiency , ad-level and keyword-level SPC predictions drive the maximum amount they bid for traffic.

Since summer, our agency's aggregate SPC has fallen by about $2, from $6.50 to $4.50. The bulk of this decline occured in October. SPC is also down year over year. On average, the SPC decline is largest for our clients selling more expensive goods.

Many of our clients instruct us to manage their search campaigns to a fixed ROI or efficiency target. Accordingly, as SPCs have fallen, our bid management platform and our analysts have pulled back on average bids.

Click volume is rising slightly, but less than expected approaching the holiday.

Taking the search engine perspective, we've seen paid search click-through rates (CTRs) fall by over a third, with some recovery in the last few weeks. Part of this "impression boom" is due to a recent increase in the aggressiveness of Yahoo's broad match algorithm, extending even to matching brands to competitors' brands.

The engines are displaying more ads to users, on average, before winning a paid click. If our clients are representative, the engines are earning less per click and less per impression. It is safe to assume the engines will try to regain lost revenue by increasing ad space and ad categories.

Other sources are reporting weak online sales. comScore announced that overall 2008 Q3 online sales were up only 6% from 2007 Q3, calling that a "dramatic slowdown" from growth rates of 12% in Q1 and 13% in Q2. comScore indicated that discretionary retail purchases and luxury retail categories were most likely to show sales declines.
MSNBC is reporting this year may prove the weakest retail October in 40 years.

In conversations with clients and non-clients, we hear many online retailers are bracing for a difficult Q4 and '09. Exacerbating top line problems, we fear many online stores will resort to heavy promotions and discounting. We fear that much of the industry will feel forced to match these tactics, leading to margin compression and profitless sales. We hope the industry avoids self-destructive promotional wars, but we're not totally optimistic.

How should paid search advertisers prepare for potentially difficult times?

First, establish strict performance targets for your campaigns, focusing on the bottom line. Think earnings, not sales. Reasonable metrics include advertising efficiency, A/S, ROI, marketing contribution, profit -- the specific metric usually doesn't matter as much as picking one that is highly correlated with your bottom line. Once you've chosen a metric, work backwards from your P&L to establish a specific numeric target for that metric which makes your financials work. Then make sure your programs meet that target. Have discipline. Don't overspend. Over-advertising will erode your bottom line.

Second, this is no time for manual bidding, for weak automated bidding, for deficient term lists, for a haphazard match-type strategy, or for less-than-informative reporting. We regularly audit search campaigns for prospective clients, and we're amazed that in 2008 we still see significant online retailers with subpar results. Don't squander opportunity through poorly executed search .

Self-plug: if you're spending $35k or more each month in paid clicks and wondering if your campaigns could be doing better, feel free to give RKG's Ryan Gibson a call at (434) 970-1010 x 110. You can read more about our services and our pricing on our site .

There are likely tough times ahead. Maintaining rational pricing and rational advertising is essential. Let us hope the election and the stimulus plans restore consumer confidence, and that sales trends head up.

What are you seeing? Please comment.


13 Responses to "Online Retail Sales Stats: Consumers Buying But Spending Less"
Alan, thanks for this, its extremely informative. From a European perpective we're not seeing this softening in the PPC market as yet, but I'n sure it will be coming
Ron Yates says:
Alan, Thanks for posting this. It's good to see how the larger players are faring in ppc in this current economic climate. October was bad, like somebody just turned off the faucet. Traffic was consistent with previous months, but conversions were way down, including ppc conversions. We just began to manage our ppc campaign inhouse now and are beginning to reign back on ppc campaigns that are not converting well. But on the bright side, November is trending upward.
Given the fact that most Americans feel "screwed, blued, and tattooed over the $700.billion dollar bank bailout, resulting in the feeling that there is 0 confidence in the money system, you can only expect Americans to spend less money and even horde it right now. At the moment, the economy stinks and everyone in the lower income brackets ALL know it. Of course they are going to eat first. I mean , really what do you expect when buying some roceries, paying the utilities, and buying a tank of gas (basically to go back and forth to work ) cost people every dime they make?
Ryan Lash says:
Hi Alan, Thank you for showing yours in aggregate; I would concur with your observations after experiencing the same trend across all of our retail clients' paid search campaigns over the past 8 weeks. Interesting note about Yahoo's 'Expanded' Advanced Match, not too many took note and I actually had to explain 'why not to run' to a client today with little evidence/online chatter to support other than my own experience with other accounts. Keep up the exceptional work! -Ryan
Susan says:
Thank you for sharing such an informative post. The graphs couldn't have spoken louder as to what is happening with sales.


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