Net retailers lure holiday shoppers with deals

Online retailers are increasing their promotions for the holiday season, but some analysts wonder whether they are giving away the store.

E-tailers are offering a range of holiday promotions in an attempt to drive traffic to their stores. For example, Amazon.com customers can use a coupon to get $10 off any purchase in the company's new toys and video games store. And Gap Online is offering customers free shipping on orders totaling more than $100.

Although industry experts agree that such promotions are surefire ways to attract new customers and encourage old ones to return, they also may compound already mounting losses at online companies. Because they cut into revenues, the promotions threaten to cast a shadow over the online holiday season for many e-tailers, even as consumers spend a record amount online.

"It's definitely controversial at this point," Vernon Keenan, financial analyst with Keenan Vision, said in an interview.

Most companies are advertising limited-time coupons, which expire before Dec. 25. CDNow has multiple promotions planned for the holiday season, one of which offered customers $10 off on orders totaling $29.99 or more.

The online music company also is teaming with other e-commerce players, such as eBay and the Gap. CDNow is allotting $10 discounts on orders of $19.99 or more to eBay users who complete their first bid on the online auction house, and is giving $10 off to consumers who spend $75 or more at the Gap's Web store.

Chris Horenz, vice president of marketing for CDNow, calls such promotions "win-win" situations for both companies because they draw new customers into each store.

"These types of promotions work very well for us," Horenz said.

E-commerce leader Amazon takes a more targeted approach to its special offers. Company spokesman Bill Curry said that Amazon uses promotions on "special occasions," such as to alert and draw customers to the opening of its new stores.

But Amazon in particular demonstrates the downside of promotions. As the company has expanded its business beyond books and music during the last year, its profit margins have steadily declined and its losses have jumped. In a conference call with investors last month, the company said that it expected its gross margins to decline further during the fourth quarter as it increased spending on marketing and promotions, among other expenses.

"We're really investing all of that money into our future," Curry said. "Gift certificates are a part of that future."

Hambrecht & Quist analyst Genni Combes said retailers utilize promotions most effectively when they use them to sell customers on more expensive merchandise. Traditional merchants such as Wal-Mart have become experts at this type of cross-merchandising and upselling, she said.

And at $10 a pop, such coupons are much less expensive than other means of acquiring customers. Amazon, for instance, spends on average of $20 to acquire each new customer, through marketing, advertising and promotions.

"Ten dollars is a fantastic customer acquisition cost," Combes said. "The question it comes down to is are they a repeat customer and are they a good customer."

International Data Corporation e-commerce analyst Barry Parr agrees. Parr contends that once customers have bought from a store, they are more likely to buy at the store again, assuming they have a good experience. But customers who come to a store because of a promotion are less loyal than other customers, he said.

"The business you get is not necessarily stick-to-your-ribs business," he said. "Once you charge them full price, they're going to go someplace else."

Online promotions are most effective when they are targeted and used as part of a long-term marketing campaign, said Jupiter Communications digital commerce analyst Ken Cassar. Unfortunately, many e-tailers seem to be using them with little discretion, paying for them out of their oversized multimillion-dollar advertising budgets, Cassar said.

With so many different promotions being offered, customers could come to expect coupons from e-tailers each time they make a purchase. "That's definitely something that keeps me up nights," he said.

Keenan likened the flurry of promotional offers to a "Wild West shoot-out," but said that few companies will be left standing when it's all said and done. Companies are using their cash reserves and venture capital to pay for customer acquisition. But with e-tailers losing millions each quarter, it's not a viable long-term strategy, he said.

"Bribery may be a fleeting way to acquire customers," Keenan said. "They just can't afford to do it."