Patience is Virtual: There is some method to the Internet’s discounting madness.
Holiday shoppers who cleaned up on discounts and deals offered by dot-coms could have found even more of a bargain at the aptly named more.com, a four-month-old operation selling health, wellness, and beauty items.
In a promo dubbed Forever More, consumers can buy featured items and lock in the discounted price for life (with free shipping thrown in, provided they make a purchase at least once each year) – a lifetime of savings for a few minute’s work.
Such flamboyant offers dominated the Web this season as dot-coms – flush with venture capital funding and IPO cash – shot for the moon in a rush to collect customers and carve out as much brand identity as possible in a few short months.
While fourth-quarter discounts and rebates abounded online, offline media spending easily surpassed $1.5 billion, though various analyses last month found that TV spots had little bearing on shoppers’ choices this season.
The cherry pickers’ paradise will end up a digital graveyard for many e-commerce companies by this time next year. Yet behind the promotional flash at sites such as more.com lie acquisition strategies as sober as any in the bricks-and-mortar universe.
More.com – a private company that got $43 million in a recent third round of financing – isn’t grabbing for revenues at any cost with its fixed-price-for-life offer. Forever More targets long-term customers by building the category and creating a strong brand identify, says director of marketing Tim Hogan. Customers have to come back to get the prices they’ve locked in.
“We are getting a very high conversion rate,” says Hogan. “We don’t give large discounts or free offers to encourage one-trip visitors. If we are going to be effective long-term, we need to attract and maintain loyal customers.”
The promo’s ultimate cost depends on inflation and new-product intros in categories that have a lot of product innovation. Shoppers who lock in on an item this month may prefer a different item next year. “This costs about one-fifth what competing online stores are spending” on promotions, Hogan estimates.
“Dot-coms should think like direct marketers by asking `What is the value of the customer? How much will he buy over what period of time [and] at what margin?'” says Jerry Shereshewsky, marketing chief at online portal Yahoo Inc.
“The Internet turns marketing completely around. Instead of going out to find buyers for your products, you are finding products for your buyers” in the process of building relationships with them, he says. “The question is, `What are the odds that I will continue to do business with you?'”
Berkeley CA-based Ofoto, Inc. believes the odds are very good indeed that new consumers will return again and again for its digital picture finishing service. Ofoto processes photos and stores them for free in a password-protected album, so customers can invite friends and family to view them and order their own prints.
In December, the five-month-old site offered 100 free digital prints to the first one million customers to sign up by Jan. 15.
“On the Internet, acquisition is the name of the game. We know that as soon as someone tries [our service] we will have him for life,” says Ofoto vp-marketing Jim Gustke. There are only about one million consumers taking digital pictures today, but that should grow to 16 million by 2003, Gustke predicts.
CONTAGIOUS STRATEGY
“One customer acquired will bring in 10 more. It’s a very viral business model,” Gustke adds.
Ofoto’s goal is to fill unused capacity for its expensive digital processing equipment. While the promo creates high perceived value, the print giveaway isn’t too costly for the high-margin business, says Gustke. Ofoto has spent about $5 per customer in acquisition – in line, he says, with any bricks-and-mortar company.
When Jersey City, NJ-based Cybershop.com offered an end-of-the-millennium discount of 50 percent to 90 percent off branded merchandise, it could have been mistaken for an entrepreneur’s do-or-die Yule. But ceo Jeff Tauber, a former buyer for Bloomingdale’s, was just blowing out year-end apparel inventory like any traditional retailer. “These were loss leaders to drive traffic,” says vp-planning and development Richard Gilbert.
Cybershop.com was four years old when its 1998 public stock offering took in $18 million. A lot of that funded a technology platform to improve customer service. “Our primary focus is not to spend money to chase consumers and revenue growth, but to achieve a more significant return on our marketing dollar investments,” says Gilbert. “It is much more important to acquire a good customer, and to execute well,” he says. “You have to stay focused on the lifetime value of the customer.”
Cybershop.com reaches shoppers via AOL and Yahoo shopping channels, offline direct-response ads, and e-mails to current and potential customers. Site visitors can e-mail a product page to a friend.
The site still is not profitable, although revenues have grown from $1.5 million in ’97 to $5 million in ’98, says Gilbert.
“At the end of the day, we want to increase our top line revenues and grow quickly, but watch the bottom line to make sure that overhead and selling, general, and administrative expenses (including marketing) are not out of wack and maintain a certain margin,” says Gilbert. Cybershop’s margin in the third quarter was 34 percent.
That sounds like a conservative formula that even F.W. Woolworth would appreciate.
