Cruising the Online Mall

By Maryanne Murray Buechner

When Bill Strauss, CEO of Proflowers.com wants to move lilies or tulips, he doesn't just show them on the company's website. He heads to the mall. To be more precise, he gets help peddling his petals from two of the largest malls on the Internet, shopping areas at Yahoo.com and MSN.com that, like their bricks-and-mortar counterparts, put lots of different stores under one (virtual) roof. While teaming up with a mega-portal to help boost business is not new, the terms of the deals have changed, and that's altering the business equation for retailers and the shopping experience for customers.

Early in the dotcom boom, when just being on the Web seemed to be an advanced business strategy, retailers were happy to pay for "eyeballs"--sheer audience size. Never mind that the impact was next to impossible to track. Today eyeballs are still an important factor, but retailers prefer performance-based deals--paying for "click-throughs" (portal visitors clicking on one of their links) and, in some cases, actual sales. "Back in the go-go days of the Internet, retailers would pay for the halo effect of being on a big portal like AOL," says David Bolotsky, who headed Goldman Sachs' U.S. retail group before launching UncommonGoods, an online and catalog gift shop, in 1999. "When they realized they were losing their shirts, there was a backlash." In the next phase, retailers started insisting on strict revenue-sharing deals. These days the pendulum has swung back. Most deals between retailers and portals fall somewhere in the middle, so neither side shoulders all the risk.

For many retailers, playing the portal game means paying for high-profile promotions in all the right categories and top placement in search returns. In the case of Proflowers, Web users who enter, say, the flowers category at shopping.yahoo.com or run a keyword search for delphinium at shopping.msn.com might see a colorful ad--maybe a pop-up, maybe just text and a photo--for a specific offer ("One Dozen Roses! $29.99"). All told, Proflowers pays in the low to mid-seven figures for a year's worth of portal ads. Depending on the contract, it might share a piece of the action or pay a bounty for each customer who clicks through. The conversion rate--the percentage of those who click through and complete a transaction during the same visit--sometimes reaches only the high single digits, Strauss says, but the click-through traffic shows that the brand is gaining exposure. "We're definitely getting more bang for our buck," he says.

The landscape is still shifting as retailers try to track consumer behavior. Here's a twist: while mega-portals attract boatloads of shoppers--Yahoo, MSN and AOL (owned by the same corporate parent as TIME) rank among the 10 most visited shopping sites, according to ComScore Media Metrix--consumers don't usually think of them as shopping sites, notes Carrie Johnson, e-commerce analyst at Forrester Research. In fact, Web users often land in a portal's shopping area by accident, attracted by an ad that appears as they are using e-mail or checking sports scores. While reading about Tiger Woods' latest round, you spy a link to a deal on golf shoes--gotcha.

Integrating e-commerce into other content areas has helped portals drive traffic and generate click-throughs for partner merchants. But when it's time to buy, consumers still tend to go straight to the source. Forrester Research asked Web shoppers how they found the site where they made their most recent online purchase, and a mere 2% said "portal or Internet mall." The majority, 62%, went to the site directly. So if portal shoppers aren't buying, what are they doing? They're absorbing marketing messages that will influence future purchases, both online and at traditional bricks-and-mortar stores, says Lisa Strand, e-commerce director at Nielsen/NetRatings. That's why eyeballs still count.

Patrick Byrne, CEO of Overstock.com a closeout retailer that sells everything from socks to $3,000 watches, says that while retailers recognize the continuing value of portal exposure, they know that they are ultimately responsible for making sales. "If Yahoo sends me 1,000 customers and I can't close the deals, then that's my fault," he says. The $3 million that Overstock spent last year to promote products on Yahoo Shopping, MSN Shopping and AOL Shopping together generated a quarter of the company's $120 million in consumer sales, Byrne says. Overstock doesn't share revenue with any portals.

Typically, it's the small retailers that pay portals based only on sales, because it's all they can afford. Yahoo charges more than 14,000 mom-and-pop shops just $49.95 a month to host their Web stores and include their merchandise in a searchable database--then takes a 3.5% cut of every sale. Few small merchants have the budgets to pay for display ads and top placement in search returns. And that's what it takes to get noticed next to several dozen heavyweight "featured stores" (Nordstrom, Godiva, Gap et al.) that are paying the bigger bucks for even greater visibility. So while the large Web retailers are cutting six-, seven- and even eight-figure deals with portals, they are effectively pushing the small players to the sidelines. "It used to be that the Web was the great equalizer," says Bolotsky. "But now money, more than ever, is dictating content."

Small retailers have been pushed clear off the field at MSN Shopping. The site's searchable database includes only products of 160 top-tier merchants, such as Dell and Sharper Image. Though MSN has experimented with revenue-sharing deals, it prefers dollars for clicks because of the greater predictability of the revenue, says Jim Barr, MSN Shopping's general manager. A typical deal might generate 25[cents] per click for a guaranteed 8 million clicks a year, or $2 million from a single merchant. Similarly, AOL's shopping area will expose you to only about 250 merchants, mainly leaders in their categories.

This isn't necessarily a bad thing for consumers, so long as they're aware of it and know the alternatives (see box). The major online retailers have buying power that often means lower prices plus brand familiarity and track records that provide comfort. AOL offers a satisfaction guarantee and will act as an intermediary in disputes in which it believes the retailer and the customer have exhausted other avenues. (Yahoo in some cases provides refunds of up to $1,000.)

The best portal for the small retailer? Surprisingly, it may be auction powerhouse eBay. Originally a place to sell knickknacks and collectibles dug out of your basement, it is now seen as a cost-efficient place for small retailers to sell new merchandise, either at auction or for a fixed price. Just $9.95 a month buys a basic storefront; an additional $40 buys some featured placements. Some big retailers pay more for prominent displays, but they account for just 5% of the $14.9 billion worth of goods sold on the site last year. That makes eBay "the most democratic place on the Web," says Johnson of Forrester Research. As for shoppers, they tend to either love or hate eBay's freewheeling, bazaar-like atmosphere and wild mix of sellers and products. Some would rather pay a little more for quicker, more streamlined shopping--just like out there in real life.