In the months preceding last year’s holiday season, dot-coms were frenetically spending advertising dollars to capture customer loyalty and establish an optimistic trend line. Surprisingly, a downside to this promotional spending emerged, and 1999’s legacy is that online consumers expected free stuff – shipping, gifts and discounts.
Now that the season is over, they expect to continue to get free stuff. Delivering what consumers now consider entitlements will be very challenging for dot-coms in 2000. This is a dilemma that the entire industry must reckon with.
Cognitiative Inc. researched this consumer-entitlement phenomenon in the January 2000 edition of Pulse of the Customer, a quarterly report focusing on online consumer issues. A portion of the study focused on how consumers responded to advertising and promotions during their 1999-holiday online-shopping experience, and what impact those experiences will have on future online purchasing behavior. From the diverse sample of respondents, the results strongly suggest that promotional offers are moving beyond the customer acquisition realm – and becoming a part of creating and maintaining customer loyalty.
Role of promotions in capturing the sale.The 1999 holiday season not only saw an unprecedented amount of advertising spending, but also a massive amount of loss-leader freebies designed to tantalize the customer to buy. Consumers reported responding to promotional offers quite frequently this holiday season. In fact, 71 percent say they bought from Web sites that offered free shipping with their purchases. Another 54 percent responded to offers of a discount on their first purchase, and 40 percent say they used online coupons. Shoppers indicate these promotional discounts definitely had impact on what sites they chose to patronize during the holidays.
Promotional offers are also expected to continue playing a role in acquiring and maintaining customers, as consumers predict that promotional offers will impact future purchase behavior as well. The research shows that more than 31 percent expect to continue receiving freebies such as free shipping, no sales tax, discounts and other special incentives. In addition, consumers expect improvements such as better product selection and improved site performance.
In retrospect, holiday loss-leader tactics of 1999 may prove to be a double-edged sword. Promotional offers were successful in getting customers to buy, but they also created customer expectations about entitlements in online shopping – a proposition that dot-coms can’t afford to maintain. Some shoppers believe that these incentives should become a permanent fixture on Web sites. And, they frankly don’t care if a company loses money because of it. If a shopper returns to a site expecting the discount and is disappointed, consumers indicate that they will simply find another site that offers a better deal. One respondent’s comments really sums up this newly developed sense of entitlement:”If I can’t find free shipping at one site, I’ll just go to another that offers it. If I can’t find free shipping online at all, I’d just as soon shop at the mall.”
The implications for 2000. The implications of the entitlement phenomenon are significant. Dot-coms made freebie offers to acquire customers. The theory was that the free offers were the first-time price of customer acquisition, and that once the customer was acquired, customer retention could be achieved through offering good Web experiences and competitive prices.
But in the fickle world of e-commerce, customer loyalty is an ephemeral and elusive concept. Does customer loyalty exist? Does a dot-com have to buy customer loyalty on every transaction? These are critical questions, especially in creating pro forma P&Ls for fledgling dot-coms, and determining whether an e-business has the chance to become a viable business in the long-term.
It’s a real Catch 22 if every transaction represents a loss because of consumers’ entitlement expectations. The business can never make it up on volume; the gross margins are unacceptable. For now, many dot-coms are loading loss leader promotional spending into marketing costs rather than gross margins, so that the Catch 22 isn’t as apparent. But if accounting practices required applying customer acquisition expenses to the individual transaction, the dilemma would be obvious. Current accounting practices are only a temporary smokescreen masking the issue.
How do we get customer entitlement expectations under control so that dot-coms can show P&Ls that are trending toward profitability? How do we tame the entitlement monster that was created by 1999’s dot-com frenzy? Will only the cash-rich survive? These are the key questions dot-coms must quickly address to sustain viability and become legitimate long-term market players.