The Myth of Free Branding

In the good old days, special offers like “Buy three for the price of two,” “Buy one and get one free” and “Get an extra 15 percent at no extra cost” were all catch phrases we knew and felt comfortable with. We recognized them and understood their meaning as we saw them in the pages of a local retailer’s discount magazine.

Most B2C businesses on the Internet weren’t slow to adopt these same tricks. Techniques that had taken marketers decades to develop and refine. But in the Internet world, the word “free” took on another meaning. Suddenly everything was free.

Yesterday, when I opened my email inbox, I found that I had received sixteen “free” offers. They encompassed everything from free email accounts, free Internet access, free website development, free screensavers and free shipment of all sorts of stuff.

Suddenly I could see everything in the consumer/retailer relationship turning upside down. Why pay for anything anymore? It’s a perfectly logical question that might spring in any consumer’s mind. Internet consumers could conceivably spend quite some time collecting free stuff and accepting offer after offer on the flashy web.

In the face of being plagued by the tremendous problem of creating sustainable revenue models, more and more sites are realizing that the “free” trick can tie a dangerous noose around their income channels.

Not only that, “free” is no longer the great lure that it once was for many consumers. Dot-com companies now find themselves having to offer even more while still battling the revenue-return dilemma. What could possibly mean more to a consumer than “free”? By now, consumers don’t expect to pay for any dot-com service, just about…

In retrospect, the trend is familiar. Many manufacturers have been more or less forced to offer free incentives to attract customers when competitors start price wars. When this happens, the focus shifts from brand attributes and brand platforms to pure commodity selling where only the lowest price and best offer are the points of discrimination for the consumer. Most business-to-consumer dot-coms are in the midst of this development as we speak.

So where will all this end if the trend continues? The results of a research study by the Intermarket Group show that Autobytel.com spends $20.40 to acquire a new customer; Amazon.com spends $27.60; Beyond.com $29.30; Priceline.com $32.30; and bn.com outlays $42.00 in the effort. A majority, 61 percent of these online merchants, reported conversion rates of 2 percent or less, while 5 percent of them reported rates in excess of 6 percent.

These figures are dramatically lower than those reported by similar studies conducted in the last two years. These earlier studies evidenced a conversation rate within the same categories of up to 60 percent higher than the Intermaket Group’s figures. So, the cost of converting a prospect to a customer has become very expensive, and the indications are that this is just the beginning.

In theory, the costs reported by the Intermarket Group’s study are the maximum amounts (probably some percentage less, based on the fixed costs included within these amounts) each e-tailer would be able to afford when offering their customers free services or products. But then what? What would happen if every e-tailer started offering incentives like this?

Nothing! Nobody would be able to increase customer share because everybody would be subject to the same rate of customer acquisition by the incentive focus.

What is the solution? I hate to say it, but once again the old rabbit has to be pulled out of the hat again the brand building rabbit.

In an Internet world where everyone is fighting to offer their potential customers free services, the only way to avoid heading into a blind alley is to systematically start dedicating money to a brand-building exercise. It’s naive to infer loyalty from a customer base developed on free incentives. These customers are only loyal as long as the incentives aren’t bettered elsewhere.

But it’s easier said than done to avoid the price war in favor of concentrating on brand-building. Most retailers have tried it, and just about the only ones left today are those who ran both horses: brand-building and price offering.

To believe brand-building is taking place via free offerings is like believing you’ll leave a hole in a glass of water when you take your finger out of it. Brand-building has never been free, it very seldom works through the use of free incentives, and is, unfortunately, only getting more expensive every day. That is the penalty of “free” offerings on the “free” Net.

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