E-tailers Realize Money Can't Buy Loyalty

In the glory days of e-tailing, many Internet pure plays spent lavishly on customer acquisition and loyalty programs, not to mention building what would later turn out to be excess capacity.

However, corporate naivete and consumer greed proved a crippling combination for those online businesses.

Savvy e-shoppers realized that the discounts and freebies offered by e-tailers -- in the hopes of instilling customer loyalty -- could be passed around indiscriminately on Internet message boards. More often than not, shoppers went with the e-tailer with the best price or the best promotion, without a sense of loyalty to any.

Ultimately, such promotions were "not really a way (for e-tailers) to build loyalty," Jupiter Media Metrix analyst Heather Dougherty told the E-Commerce Times.

As a result, online businesses have been forced to rethink their promotion strategies, according to Dougherty and Forrester Research analyst Christopher Kelley.

Abuse on the Loose

Some promotions were "easy to abuse," Dougherty said. "There was nothing to stop [coupon codes] from being used repeatedly."

Now, companies are starting to individualize codes, Kelley told the E-Commerce Times.

"They're also getting away from codes tied to incredible deals," Kelley said.

E-Day of Infamy

Among the corporate promotions that were abused during the 1999 holiday season was a US$50 coupon from Buy.com.

Although the coupon was meant only for certain consumers, it was widely used by Internet shoppers who found it posted on message boards. Some consumers used the coupon repeatedly by placing orders under different e-mail addresses.

Other infamous promotions included an Ashford.com promotion that was meant to give consumers $150 off purchases of $500 or more -- except that according to Dougherty, Ashford put no protections in place to ensure customers made the minimum purchase.

Dumb and Dumber

Dougherty said that most consumers who abused such promotions felt no guilt. Rather, their attitude essentially was, "If you're dumb enough to let me get away with it, why not?"

Unfortunately, according to Dougherty, the cost of these promotions proved "pretty devastating" for many e-tailers and most likely contributed to the demise of some.

Now, instead of major giveaways, Kelley said, e-tailers are starting to offer free shipping or monitored discounts for purchases over a certain dollar amount.

E-tailers are also starting to use e-mail to build relationships with consumers, as well as offer targeted deals to repeat customers.

Build It And ...

However, in addition to ill-fated endeavors to promote customer loyalty, e-tailers overspent in other ways. Namely, they burned though venture capital dollars while building excess capacity.

"They thought in the long run they would be profitable and that the money would keep flowing (from venture capitalists) until they started making money," Dougherty said.

Dougherty said that online grocer Webvan "built big and built fast, without assessing demand." Defunct online delivery service Kozmo was another that spent heavily building capacity, according to Kelley.

Both Webvan and Kozmo eventually found their business models unsustainable and folded.

Reality Check

Eventually, the dot-com downturn forced e-tailers to reevaluate their growth plans. And many companies pulled back significantly on customer-acquisition expenditures such as coupons, free gifts and the like.

"Spending has become much more efficient," Dougherty said.

According to Dougherty, many companies, including Buy.com and Bluefly, have managed to avoid closing shop by curtailing their spending and developing more realistic growth expectations.