New Orders Fall As PetMed Express Cuts Ad Spending

Here’s a fact that will surprise absolutely nobody: When a marketer cuts advertising spending, its ability to attract new customers will fall.

Here’s a fact that will surprise a few folks: For PedMed Express, it doesn’t seem to have mattered – at least, in the near term. The company’s sales rose from $59.6 million in second-quarter 2008 to $62.4 million in second quarter 2009. And its net income jumped from $5.8 million a year ago to $6.3 million. The most recent quarter ended Sept. 30.

All this happened while PetMed Express was chipping away at its advertising spending, which dropped from $8.7 million – 14.5% of sales – a year ago to $7.8 million – 12.4% of sales -- in the quarter just ended. Don’t look for this to turn around soon: The company anticipates its advertising spending will be between 12% and 13% during its 2010 fiscal year.

PetMed Express relies on television, online and direct mail and print campaigns to tout its pet products. Cut spending on these, and the company’s ability to attract new customers is bound to fall. And it did – new customer sales, which made up 30.6% of sales revenue a year ago, fell to 26.7% for the quarter just ended. The company acquired 233,000 new customers during its most recent quarter, down from 239,000 new customers in second-quarter 2008.

The cost to acquire each of these new customers was $33 apiece during the most recent quarter, compared with $36 a year ago.

Where did the company cut its ad spend? From the boob tube. According to PetMed Express documents filed with the Securities and Exchange Commission, there is less remnant television advertising inventory for it to purchase.

The company primarily takes orders through either its online channels or through a contact center. A year ago, Internet sales made up 65.5% of all sales. In second quarter 2009, this channel pulled in 67.5%.

Average spend per order dropped from $81 a year ago to $78, a fact the company attributed to some customers buying smaller quantities – three packs, as opposed to six packs. PetMed Express attributed this to frugality due to the rough economy.

The Bean-Counter’s Take: In a paradoxical twist, the very reason PetMed Express gave for lower average order spend probably contributed to the boost in its net income. Customers may have been purchasing smaller quantities – three packs, as opposed to six packs, as cited above. But these lower-count packages tend to have higher margins. Want proof? Net income in the most recent quarter was 10.03% of sales, compared with 9.77% a year ago.