E-tailors Pricing, Costs, and Accounting Gimmicks 202
"Using Discounts to Build a Client Base"
By BOB TEDESCHI
In a business environment in which e-commerce sites often sell goods
at a loss in order to attract customers and build a brand name, it is no
surprise that consumers expect the Web to be an around-the-clock fire
sale, with the next bargain just a click away.
Indeed, according to a recent survey
conducted by Esearch, an Internet
research firm based in Los Angeles, more
than half of online shoppers expect a 20
percent to 30 percent discount from the
standard retail price when buying an item
that would normally be priced between
$30 and $500.
It is an understandable expectation, given
that deep discount is a virtual battle cry for
some of the Internet's best-known
retailers. But that sense of consumer
entitlement could return to haunt
companies that have come to rely too
heavily on discount pricing.
Analysts and executives say that unless Web retailers find healthy sources
of revenue from attendant activities like advertising or data mining, there
is simply no way to sustain a viable business without building a
sustainable profit margin into most sales.
Computer electronics sites were the Web's price-cutting pioneers and
are still among the most aggressive retailers pursuing this strategy.
Companies like Buy.com, a computer and electronics retailer, have made
a name for themselves by guaranteeing prices 10 percent lower than their
top three online competitors. Meanwhile On Sale Inc., another Internet
computer retailer, says it sells goods at cost -- plus "payment and
transaction processing fees."
This loss-leader approach has since spread to other product categories,
with Web sites selling certain items at a loss, hoping to make up the
difference from sales of other, more expensive items or from future
business from customers who initially came for a bargain.
Reel.com helped build a following this way last fall, offering the "Titanic"
video for $9.99, nearly $20 less than the list price. The move generated
over 300,000 sales, the company said, and helped solidify the site as a
leader in its category.
Amazon.com, meanwhile, started a price war among online booksellers
two weeks ago by offering 50 percent discounts on books appearing on
The New York Times best-seller list. Barnesandnoble.com and
Borders.com quickly followed suit.
While Amazon.com declined to comment on the effect on sales, Ben
Boyd, a Barnesandnoble.com spokesman, said the price cuts had
resulted in an unspecified "incremental" sales gain as a result of increased
traffic to his company's site.
For retailers with less established followings, traffic is everything. "There
is a strategy out there that says 'I'm going to loss-leader my entire store
to get you to know me, then I'll worry about evolving the model into a
profitable one," said Ken Orton, former chief executive of the online
company Preview Travel, and now chief strategist for Cognitiative, a
consulting firm.
Orton, who also sits on the board of On Sale and the Internet wine
retailer Virtual Vineyards, said the more conventional approach was to
offer low prices on only certain items. "I bought a Palm V on the Web
recently and got a great price," he said, referring to the popular personal
digital organizer. "But you can bet they won't discount all the other things
that go with it," he said. "If you look at it from the standpoint of building a
business, it makes sense."
It may make sense during the current customer acquisition frenzy. But it is
not sustainable over the long run, said Gary Echhorn, chief executive of
Open Market, an e-commerce software company. "At some point, the
world will have to figure out the need to actually make a profit to stay in
business, so the price wars will be mitigated by that," he said. "You can
only suspend the laws of business for so long."
The good news for Internet retailers is that despite consumers' professed
interest in finding bargains online, research suggests that they are a bit
lazy about seeking them out, preferring to use reliable merchants with
well-known names. A recent McKinsey & Co. survey found that more
than 80 percent of online shoppers do not compare prices before buying.
"It's very counterintuitive, but so far the trend among customers has been
not to compare prices," said John Hagel, who leads the e-commerce
practice for McKinsey, a management consulting firm. "Customers, once
they come online, tend to settle quickly on one site in a given category,"
he said.
Part of the reason, Hagel said, is that the most popular items now selling
on the Web are low-ticket goods like books and CDs, which provide
little financial reward for price comparison.
Another reason, he said, is that the technology that allows consumers to
compare prices for a particular product from different merchants is still
somewhat unsophisticated. These "shopping bots," as they are known,
are offered by portals like Excite, as well as niche sites like Cnet's
Shopper.com service. While they sometimes turn up a good deal, the
results can be inconsistent.
A search on Excite's shopping service for "Nike Air Jordans," for
example, turned up nothing on one day, despite repeated attempts, but
did yield results the next day. Meanwhile, an all-categories search on
Amazon.com's Shop the Web service yielded no results for the term
"Levi's jeans," even though Levi Strauss pays to be listed in the service.
(An Amazon spokesman could not account for the problem.)
If price comparison services improve -- and include ratings for merchants
on factors like customer service, product availability and shipping charges
-- retailers could face more price pressure as shoppers show more
proclivity to stray. But for now, Hagel said, consumers seem to be
showing some loyalty. "Once people learn how to get around a site and
have a positive experience, they tend to go back."
And even if some consumers change their behavior and begin to
comparison-shop more aggressively, some industry executives expect
that retailers that do not play the discount game will still find customers
online, if they seem to provide superior service.
"There's always going to be customers who look for price, and there's
always going to be customers who look for service, just like some people
shop at Saks and some shop at Wal-Mart," said Eli Katz, president of
e-commerce for Fragrance Counter and Cosmetics Counter, which do
not discount. "That will hold true on the Web as well. |
