Net Firms Offering Freebies Are Paying Dearly: Consumers Expect Even More
No such thing as a free lunch? Tell it to Web surfers on the Internet, where everything from computers and pet food to cold, hard cash is being given away.
Borrowing a page from television and other advertiser-supported media, scores of Web sites are giving away products and services in hopes they will attract enough advertisers and shoppers to become profitable. And several Internet companies--including Dealoftheday.com, WinSweeps.com and Absolutely Freebies--have sprung up trying to make money by directing Web surfers to the ever-growing number of online discounts and giveaways.
Although free product samples, trial subscriptions and other come-ons have long been a staple of American commerce, the Internet giveaways are testing the staying power of fledgling Web companies, some of which are into their fourth or fifth year of bleeding red ink.
Indeed, last week EMachines, based in Irvine, said it could no longer afford to provide free Internet access to its customers.
The deals also often come with strings attached. According to the Federal Trade Commission, more than 90% of online merchants gather some kind of data about their visitors. And some operators, such as grocery service Streamline.com, ask that customers provide such personal data as the number and ages of children in a household.
Nevertheless, the proliferation of deals on the Net is transforming consumer shopping psychology. With price comparisons and contests just a mouse click away, consumers are acquiring a penchant for bargain hunting that Jack Benny would envy.
Take Valerie Yates. After two years of browsing on the Net, the Washington lawyer can recite a litany of promotional come-ons. She takes particular pride in securing a Palm Pilot V electronic organizer recently for $100 less than its $399 list price. And just before Christmas, she purchased a board game called Operation for her nephew after Toys R Us’ Internet site offered free shipping and a $5 discount from the game’s regular $12 store price.
Another Washington lawyer, Carl Messineo, in November won a $25,000 shopping spree from electronics retailer Outpost.com just for giving the site his name and e-mail address. He used the winnings to outfit his law office with several new computers.
Last year, FamilyWonder.com briefly held a promotion in which it promised to write customers a $20 check if they filled out a brief survey and bought at least $20 worth of goods from the site. And Web portal IWon.com, which has the backing of the CBS television network, has a contest in which it hands out $1 million each month to a lucky visitor to the site.
The cyber-merchants counter that their promotions are not unusually lavish and that their cost is often paid back many times over if a shopper becomes a long-term customer. And they add that many merchants are shifting away from offering eye-popping deals to concentrate on customer service in the wake of complaints about online snafus in which merchants failed to deliver goods in time for the Christmas shopping season.
“We offer tremendous value day in and day out,” Amazon.com spokesman Bill Curry said. “We may not offer the absolute lowest price. But we offer a dedication to provide the absolute best customer service.”
Yet nearly all online sites, including Amazon, continue to offer free shipping and steep discounts on at least some of their merchandise to lure customers. Web promotions remain so enticing, they’ve even attracted rival cyber-merchants.
Petsmart.com Inc.’s chief executive, Tom McGovern, for instance, has vowed that his company will never succumb to “the narcotic of free shipping.” But he did confess to doing a little bargain hunting himself. Last year, he sprang for an offer from More.com to deliver razor blades for just the $1 product price. The health and fitness Web site pledges not to raise the price on its blades for as long as McGovern continues to order the product.
“It’s some deal,” McGovern said.
Since the e-commerce revolution began about five years ago, cyber-merchants have increasingly resorted to such flashy promotions to build Web traffic. And the Web entrepreneurs all generally hope to make money in one of three ways:
* Pure online merchants, such as Amazon.com, Value America Inc. and Buy.com, hope to make money selling goods to shoppers and advertising to credit card issuers, publishers, stock brokerage firms and the like.
* Web portals, such as Yahoo and Excite.com, focus mostly on selling advertising but sometimes get transaction fees on any sales their advertisers make to Web visitors.
* A few Web sites, such as America Online Inc., have multiple revenue streams. The online giant gets a monthly $21.95 subscription fee from each of its 20 million members, sells advertising on its Web pages, gets a transaction free from some sales and also charges content providers for Web space.
But those models are being tested by the economics of the Internet, which has dramatically slashed the cost of getting into the e-commerce game. Today a would-be cyber-merchant can get a computer, a Web connection, an e-mail account, voicemail, fax service and a Web page to advertise his business--all for free. That’s why competition has become so stiff and discounting and promotion so widespread.
A study of online discounts, deals and sweepstakes released last summer by Jupiter Communications, an Internet research firm, said most Internet giveaways don’t work. They mostly just fuel consumers appetites for deeper discounts, it said.
“The business model of bribing customers to buy has yet to be proven,” said Michael May, a Jupiter analyst who helped compile the study.
Citing bids by several companies to offer free personal computers to browse the Internet in exchange for a user giving up part of his computer screen to a stream of online ads, May estimated a company would need to sell $8,000 worth of online advertising to cover the cost of the PC.
“Any site that thinks it’s going to have an advertising-driven strategy is probably misguided,” said Alan Alper, who follows e-commerce for Gomez Advisors Inc. in Lincoln, Mass. “The bottom line is: There isn’t a free lunch. You have to be selling something.”
Of course, giveaways have proved popular--and profitable--in the old media.
“Who Wants to Be a Millionaire” is a hit on ABC, and the Fox challenger “Greed” has also scored well in the ratings. Still, experts marvel at the breadth of giveaways and promotions on the Internet by companies with far shallower pockets than the television networks.
“Loss leaders are not a new phenomenon . . . but what’s so interesting is that merchants on the Web have taken it to a much further extreme,” said Shane Greenstein, an associate professor of management at Northwestern University.
“The only reason these giveaways would make sense would be if consumers were loyal,” Greenstein said. “But then the question arises, why would you expect consumer loyalty in cyberspace when we don’t see that in the non-virtual world?”
Indeed, the proliferation of Web merchants has some consumers, such as Boston University professor Bruce D. Weinberg, playing one against another.
In recent months, Weinberg has been testing grocers in Boston, where four online firms compete to make home deliveries. One, Streamline.com, last year offered Weinberg $75 off the first order and delivered the groceries to his door for no additional charge. The company has since reduced the discount to $50, but Weinberg remains amazed at the generous deal.
“They bring the stuff to your door, sit it down on your counter and take back the returns--I don’t know how they [can] afford to do it,” Weinberg said. “I’ve just been blown away by the deals online. This is a great time to be a consumer.”
