Payback Time - online giveaways - Industry Trend or Event

Industry Standard, The, Jan 15, 2001 by Michael Mechanic

Online giveaways are out. "Prudent promotion" is in.

There was a time, from late 1998 to early last year, when it seemed consumers could go online and get practically anything for free. With too much money chasing too few customers, companies were ladling out an alphabet soup of freebies: CDs, MP3s, PCs and DVDs. Buy.com was hawking goods below cost. Drugstore.com and its rivals scattered handfuls of free shampoo and toothpaste with nominal purchases. Health and beauty retailer More.com let customers lock in prices "for life." (The company's own, not coincidentally, proved brief.) And the Web overflowed with drawings for cash, cars and tickets to paradise.

It seemed too good to be true. And it was. Such inflated customer-acquisition spending -- typically about twice that of the brick-and-mortar set -- just wasn't sustainable. As business sense made a comeback over the past year, the parade of online profligacy lost its steam.

Though the freebie is unlikely to disappear from the Web altogether, 2001 stands to be the year of prudent promotion. "These outrageous discounts don't work in the offline world, and they don't work in the online world," says Fred Toney, president and COO of Health Central, an online drug retailer that recently purchased parts of Vitamins.com, DrugEmporium.com and the faltering More.com. Among the things Health Central didn't buy: More's fixed-price customers. "We've seen a lot of companies go away because of promotions that didn't make a lot of sense," Toney says.

The survivors will play smarter. Consider EqualFooting.com, a goods-and-services portal for small-business owners that offered $50 worth of free stuff this past fall to get new customers to register. It might sound like old times, but Equal-Footing carefully aimed its monthlong promotion at likely repeat customers and is tracking the spending of those who signed up. Buy.com, for its part, has stopped selling items at a loss. And while e-retailers still offer discounts, they come in old-economy sizes of 15 percent to 30 percent.

While the practice of handing out "free" computers to customers willing to sign a long-term ISP contract was largely dead even before the Nasdaq tanked last spring, this year may witness the end of other free rides. December was portentous: Napster, the very symbol of free online music, began retooling itself to someday charge for services, and MP3.com rolled out fees for premium music storage.

And then there are the providers of free Internet access. In December, AltaVista pulled the plug on its no-fee online service, 1stUp.com, leaving millions of customers without Internet connections two weeks before Christmas. Spinway, which had partnered with retailers to offer consumers free Internet access, also collapsed -- though Kmart's BlueLight.com jumped in to keep shoppers hooked up through the holidays.

Even Juno, which pioneered free Net access, is trying to persuade customers to upgrade to its premium packages -- an improvement over its bare-bones free dialup service, which bombards users with ads while offering limited access and minimal customer service. In today's Internet Economy, in other words, you get what you pay for.