Where's E-Commerce's Power? Hint: Not in Pricing
These companies are seen as powerful because they control distribution. They have access to the consumer, and they use that access to maximize their profits.
Is there anyone in direct marketing who is as powerful? Well, Fingerhut, Lands' End and L.L. Bean sell an awful lot of products. But because the market is open to anyone who can buy a stamp, none of these companies has the power to make or break a supplier or the ability to control a market to where they can dictate prices.
The question we're all trying to answer when we look at the Internet is which model will it follow? Will marketers be able to blanket the country with so much muscle that they become a Wal-Mart (responsible for 25 percent of all laundry detergent sales nationwide) or will it remain an open free-for-all, with countless new entrants but no real market dominance? The answer is important because it will drive not just the stock market but the way your company does business in the next century.
Some pundits have predicted that in a world of instant and nearly perfect information, prices will drop and the real winner will be the consumer. After all, if you can buy a Toshiba laptop from one online store for $400 less than another, why shop at the more expensive store?
To some extent, these experts are right on. Pure commodity products, sold by middlemen, are the last place a direct merchant will make big money online. Amazon, CDNow and others have certainly created market dominance, but the day they increase their prices and margins too much consumers may flee.
I don't believe, however, that price alone drives commerce. None of us drives the cheapest car, wears the cheapest shirt or stays in the cheapest hotel. Instead, we buy for a complex set of reasons, of which price is just one component. And as soon as the merchant differentiates its products, making it impossible to do a straight apples-to-apples comparison, price becomes far less important.
So where's the power? What is the key to unlocking profits online?
Permission. The right to sell stuff to people. The ability to deliver anticipated, personal and relevant messages people actually look forward to receiving. Permission marketing is the key to the Net, and the smartest online marketers are already embracing it.
Imagine owning a relationship with 4 million people. Knowing their likes and dislikes, but far more important, having that knowledge reciprocated by the consumer - a consumer who knows you, trusts you and can't wait for the next e-mail you'll send them.
What is that permission worth? For American Airlines, the frequent-flier program is worth billions. For Amazon, the 4 million permission-based relationships they have are responsible for a large part of their market cap. All of the online winners have spent significant money to attract consumers, but more importantly, they've invested time, money and patience to turn that attention into the ability to dialogue.
Direct marketers are in a great position. Unlike other marketers, they realize that the lifetime value of a customer is key. No one makes money on their first catalog mailing - it's the long-term customers who make it pay. It may cost $30 or $60 or $200 in online media to generate your first online sale. But once you make that first online sale, you can use proven permission marketing and direct marketing tools to turn that attention into profits.
There's a fly in the ointment, though (there always is, isn't there?). The reason there will be profits generated online is that not everyone can have permission. Consumers can control who they talk with and who they hear from online. Permission can't be rented or sold. It's not like a mailing list. You have to build your own permission. You have to spend the media dollars and build the programs, promotions and ongoing support that create an audience - one person at a time. Without exception, every single direct marketer who has come online and tried to do business the old way has failed.
Where's the power online? With the permission holder. The permission holder can dictate pricing and terms to his suppliers, because they don't have permission and can't get it quickly. The permission holder has far more latitude on pricing as well, because competitors without permission and with nonidentical products are essentially invisible.
So the race is on - the race to grab attention once and, more importantly, the race to turn that attention into a lifetime of permission and a lifetime of profits.