The Blue Nile Lesson Internet Marketing for Internet Retail : The Preston Blog

The Blue Nile Lesson

Filed under: internet retail, marketing |

Blue Nile released their financials for Q4 2005 and missed their earnings targets. The explanation from the company is that keywords during the holiday season were bid to irrational levels meaning that if they had tried to compete for the top spots they would have had to do it at the expense of profitability. As a result they have shifted much of their ad spend offline.

I like Blue Nile and I believe that keyword prices in their industry have in fact been bid beyond rational levels. We have seen it happen to us on many different keywords and I believe it is a result of an influx of marketers who don’t know how to track their ad spend or are willing to take a loss leader in exchange for some brand equity.

The internet retail world is no stranger to irrational ad spending - look at 1999 for proof. Eventually people will realize that they cannot operate indefinitely without profits and search spending habits will change - this will be good for Blue Nile (and other companies who are vigilant about maintaining profitability) and bad for Google as its stock will have to adjust to reflect more modest expectations of search revenues.

This temporary market inefficiency will not affect all industries in the short-term, but over time I would expect any industry with promising growth to experience demand for search inventory which exceeds the supply that would in a more perfect world result in some kind of equilibrium. My advice to retailers is to meticulously watch your bottom line and keep your cash flow healthy in spite of newcomers who are willing to shoulder a short-term loss - they won’t be around for long.

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