Dot-Coms Re-Evaluate Ad Spending Habits

Brandweek, June 19, 2000 by Jennifer Owens

Like kids who have already spent their million-dollar allowances, many dot-com startups have begun rethinking their spending--specifically their advertising and marketing spending--as venture dollars dry up.

"We've seen it all over the place," said Carl Johnson, president and CEO of TBWA/Chiat/Day in New York, "not just from current clients, but from the tone of new business clients."

Bill Katz, president and co-CEO of BEDO New York, agreed, saying, "What I'm finding is yes, the dot-coms are being pressed for more performance by their venture capitalists; yes, they're being pressed for profit, or at least to make their numbers--and that is having an effect on how they spend their marketing dollars."

Typically, he said, "more money is being put into direct marketing because [clients] are convinced and have been convinced that direct marketing will get them that kind of expediate return, which is directly in line with what their backers are asking them for."

But while direct marketing works, Katz cautioned, "they'll never have a brand and their long-term success will not be assured."

While not all agency executives polled by IQ had experienced the same direct marketing shift, all agreed that marketshare is no longer a magic money word.

And yet, said David Hernandez, executive creative director at Chicago-based Quantum Leap, "the new companies are in a Catch-22 because they need to capture marketshare and they need to spend money to capture marketshare [ldots] but the venture capitalists won't give them money unless they have some marketshare."

All of which means that agencies dealing with Internet pure plays have to be that much more careful in choosing new clients.

"We have to have a real belief that the business model works and not be blinded by the dollar signs," said Mike Alexander, director of client services for Marketing.com, an Overland Park, Kan.-based interactive agency. "If it's not a legitimate business model, then great advertising and promotion is not going to do anything but kill it faster."

Said Chiat/Day's Johnson, "It's no use to an agency to have a quick flash in the pan. I mean, OK, you get some money in the short term, but what agencies should want is long-term, enduring relationships with substantial, growing, real businesses [ldots] I think with the right relationship, you've already been rethinking [spending] and you've been in the position of advising them."

From the VC's perspective, said Lance LeMay, a managing partner with October Capital, Kansas City, Mo.-based VC firm, it's all expense and it's all being scrutinized more.

"The question is how do you maximize the value of the expense? I don't want any of my portfolio companies being cheap, but I want them to get the most out of their money," said LeMay.

"Marketing and advertising is going to be a major component of any business plan," he added, "hut you must spend wisely. If we have a company that goes under and you have a bunch of Sun servers sitting around, you can sell those. You can't go back and sell your ads."