Originally created 05/15/00

E-tailers learn lessons of consumer behavior

SANTA CLARA, Calif. -- Drew Harris answered the call of MotherNature.com when the online retail company offered $20 off and free shipping for any purchase.

The San Francisco man ordered about $40 worth of hair care products and shaving cream under the one-time deal and never went to the Web site again.

"For me, it was because I wanted the free stuff," Harris said. "It's just as easy to stop by the barber shop and pick up (hair products) on the way home because it's much more convenient than it is to sit down at a computer, order it and wait for it."

Funding for online retail companies suddenly is in sharp decline, stocks have tumbled, and Forrester Research predicted late last month that "the tide is turning against dot-coms" and that many companies will fail within the year.

So Internet businesses are offering everything from free shipping to giveaways of millions of dollars to build a base of preferred customers.

But many startups are learning a hard lesson: consumer behavior is not only unpredictable but much harder to track on the Internet - a reason many online retailers will fail in coming months, analysts say.

About 127 million, or 63 percent, of American adults were using the Internet as of February, according to research firm Dataquest. But only 58 million had bought anything in the previous three months, and most of those sales involved relatively low-profit margins on items such as compact discs, movies or books.

"Shopping online is an accident," Dataquest analyst Harry Hoyle said flatly. "Most people have Internet connections for either work at home, games or a child's education" rather than e-commerce."

So how can companies turn window shoppers into Web buyers?

In the bricks-and-mortar world, retailers target customers by keeping records of previous sales and trading that information with other businesses. That's why you might receive an offer for a home decorators' magazine subscription or fliers for new appliances from Sears after you are approved for a bank mortgage.

But in the world of e-commerce, there's concern that information is being exchanged more easily, resulting in unwelcome intrusions into consumers' personal lives.

"The best way to find a buyer is to see whether they've bought before and what they bought before," Hoyle said. "But so far, no one has been able to figure out a way to do that that passes scrutiny."

Indeed, online advertising giant DoubleClick created a controversy last winter when it suggested it would combine all the online information it had amassed from Web surfers - tracked by software attached to your browser with identification numbers - with offline data that included a person's name, address and phone number.

Many consumers were unaware that bits of information, known as "cookies," collected as they browse the Web, allow companies to track their online movements. The idea of attaching names to that information raised alarm bells and has led to a Federal Trade Commission investigation of DoubleClick.

The world's top Web destination, Yahoo! Inc. also revealed it is the target of a federal investigation into whether it is violating consumer protection and privacy policies.

The concern about where to draw the line is making it difficult for online retailers to compete effectively as the number of Internet newcomers slows and experienced surfers stick to their familiar brand names.

Many have sought to stand out by spending millions on advertising.

And at MotherNature.com, customer incentive programs are still key.

"We do believe that some inducement is necessary to get people to try us," chief marketing officer Jeffrey Steinberg said. "We've tried a lot of different methods and are happy with the $10 off on your first purchase we currently are offering."

Although the company continues to lose money, he said 48 percent of MotherNature.com's first-quarter revenues came from returning customers, up from 42 percent the previous quarter.

Others, such as new Internet portal iWon.com, are trying a tactic used by long-distance phone carriers years ago when they were locked in costly battle for customers. Iwon offers surfers the chance to win $1,000 daily and $1 million a month as it attempts to build in a loyal following.


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