The Numbers Racket - Amazon.com, Priceline.com, Barnesandnoble.com, Bluefly customer relationship management - Company Business and Marketing

Industry Standard, The, Dec, 2000 by Debra Aho Williamson

E-tailers woo investors with perky reports of rising sales and loyal customers. But are the statistics real -- or deliberately deceptive?

The retail chestnut "customer for life" is taking on a new and disturbing meaning on the Internet.

Perhaps you bought a pair of fuzzy booties online for a friend's baby shower, though you don't plan to have kids yourself for a decade. Or you stumbled onto a vitamin site and, in a moment of weakness, signed up for a newsletter. Chances are that two years later you're still being counted among the loyal clientele of both sites, though you've never revisited either.

Each quarter, Internet retailers release not only financial data but also detailed information on how many customers they have, the number of new customers they've added, and what percentage of sales come from repeat customers. Invariably, the figures look good. But retailers can easily manipulate these "customer data" statistics to their own advantage, hiding serious flaws in their bottom line. The problem is, there are no common definitions for basic terms like "customer" or "repeat customer" and no rules for how such information should be tallied and disclosed. Which means there's no way to determine something as simple as how many customers purchased last quarter vs. three years ago.

Consider Amazon.com, a prime example of such obfuscation. In its quarterly earnings press releases, the company routinely raves about its customer growth. A quote from Amazon's second-quarter 2000 announcement: "Cumulative customer accounts increased by 2.5 million during the second quarter to more than 22.5 million as of June 30, 2000, and now stand at more than 23 million. Repeat customer orders represented 78 percent of orders in the second quarter, up from 70 percent the previous year." At first glance, it sounds great: Amazon has more than 23 million customers, and a sizable chunk of orders came from return customers.

But the statistics are surely not as rosy as they seem. Since Amazon won't discuss its customer statistics in greater depth, no one -- save Amazon's executives -- really knows how many of those 23 million customers actually purchased something in the last 12 months, and how many bought a single book three years ago and never returned. Nor will Amazon say, publicly, how many customers might be counted twice because they used two e-mail addresses or registered more than once using different street addresses.

The repeat-customer statistic is even murkier. All it says is that of the orders placed in the quarter -- whether 100 or 10 million -- 78 percent of them came from people who had purchased before. Since Amazon won't divulge how many orders it received in the quarter, or how many individual buyers actually made a purchase, the figure is virtually meaningless. In fact, it's not even clear whether it's positive or negative: If the percentage of sales from repeat customers increases every quarter, does that mean a retailer is having trouble wooing new customers? "Telling me 78 percent of sales are to repeat customers doesn't give me any indication of how many customers are still around," says Peter Fader, an associate professor of marketing at the University of Pennsylvania's Wharton School of Business. "I think they know that people don't come back. They're living in denial or trying to keep the truth from their investors."

Amazon isn't alone. Myriad Internet retailers, from Priceline.com to Barnesandnoble.com to Bluefly.com [see story, page 94], tout such customer statistics. Drugstore.com, for example, states in its second-quarter release: "Drugstore.com added 232,000 new customers over the previous quarter, while orders from repeat customers increased from 50 percent of total orders in the first quarter to 59 percent of total orders for the second quarter of 2000." But nowhere is there an explanation of what those numbers mean.

Some sites put out a flood of customer statistics under the guise of full disclosure. But the numbers serve another purpose: to hide dismal finances. Clothing retailer Bluefly.com filled its second-quarter 2000 earnings press release with customer stats: 130,000 new registered users, 36,063 new customers, 46 percent of revenue from repeat customers. And the company went further, listing 109,000 "active" customers who purchased in the past 12 months. The numbers sound healthy, but the dollars tell a different story. The

company lost $5.3 million on sales of just $4.3 million in the quarter. It also has hired bankers to seek additional funding. "We have always taken the position that because we're a public company, it's our obligation not only to share what's publicly required but information that we think is reflective of the trends our business faces," says Ken Seiff, Bluefly's CEO. "Consequently, we have shared a lot of metrics we're not obligated to share as a result of SEC rules."

But some observers smell a skunk. Says Wharton's Fader: "I imagine that they're shrewd enough to see the truth, but they hope that we're not. Unfortunately, virtually all investors and researchers and journalists let them get away with it'