Recent changes in market valuations are forcing dot-coms to become wiser in the ways they acquire customers. Originally, the strategy was to acquire as many customers as possible, at any cost, in a blind grab for market share.
This year's Super Bowl spend-fest was evidence of this idea taken to the extreme. Over time, there has been a move toward better targeting of consumers, partly because of the growth of e-mail marketing and improvements in technology. This resulted in more companies specifically targeting the right customers, while most companies still focused less on the cost side. Due to recent shifts in market conditions, however, many Internet companies are shifting their focus to getting the right customers at a price that makes sense for their business models. This is probably the way most companies should have focused their efforts all along, but the blind emphasis on “getting big fast” overshadowed concerns of efficiency and profitability.
Aggravating the problems with customers-at-any-cost strategies, the dot-com world is flooded with companies that compete primarily on price without much consideration for how to best build brand and lasting relationships. Many Web sites believe that if they pay to get people to their site and sell them product below cost, then these customers will continue making transactions at higher prices. But if you get a customer to make a few purchases based on price discounts and then stop, expect that customer to go looking elsewhere for the next great deal.
While price promotions have some hidden dangers, well-conceived promotions are a key part of any strategy for generating new customer relationships. Promotions can be effective at compressing the customer buying life cycle. Promotions are so important that Forrester Research predicts promotion spending will increase sixfold over the next five years.
So what is the most effective type of promotion to encourage online transactions and generate the right types of customers: price discounts, coupons, sweepstakes? Many companies report using these tools, but according to Forrester Research, free merchandise — a free sample, free gift or gift with purchase — proves to be most effective. From free hangover relief to free PCs to free condoms, free stuff is all over the Internet. Free is attention-getting, calls for immediate action, reduces purchase barriers, drives visitors to specific pages to improve profitability and, most importantly, doesn't create the perception of heavy discounting. Free offers also can be designed to attract the right types of customers for your business.
Used strategically, free is a great tool. On the other hand, misusing free offers in the search for new customers can have unexpected negative effects or generate the wrong customers for your business. For example, the higher the perceived value of a free offer, the greater the response. But with that response also comes a greater possibility that you may attract a larger number of the wrong consumers, or consumers with the wrong motivations. At the same time, the lower the perceived value of the free offer, the less the response. The key is to optimize the perceived value of an offer to meet your specific goals and needs. As with all direct marketing, that means test and test again.
The use of free can be a very effective tool throughout the consumer life cycle. Free samples, information and trial offers drive trial and consideration toward new product purchases. A free gift with purchase increases purchase likelihood at a retailer. Free shipping removes barriers to purchasing online. Free points or gift certificates reward repeat buyers.
The best free promotions on the Web are geared toward enhancing a consumer's lifetime value. They are targeted to a specific audience, encourage first-time trial and help build a customer database. Develop a great consumer research team to help you target your offers to individuals who closely match your most profitable customers. Be sure to track behavior by targeted groups and measure acquisition costs and lifetime value.
Consumers won't do “anything” for free things. The use of free promotions works to surface interest and intent, build comfort with online transactions, encourage word of mouth and build an audience quickly. However, remember that using free offers strategically is only half the equation for success. If consumers are not completely delighted by the experience and service they receive, loyalty will suffer. It's up to you to provide a fantastic site experience that includes good merchandising, easy ordering and outstanding service. Make sure to develop strategic promotions backed by superb service. You can't bribe loyalty.