The seven myths of online loyalty – part four

In this seven-part series, I explore some common myths and misconceptions about building customer loyalty online and, more specifically, explain why many of the loyalty tactics employed on the Internet simply don't work. Previous instalments can be found online at www.strategymag.com...

In this seven-part series, I explore some common myths and misconceptions about building customer loyalty online and, more specifically, explain why many of the loyalty tactics employed on the Internet simply don’t work. Previous instalments can be found online at www.strategymag.com by searching for ‘Seven Myths.’

In this month’s column, I delve into online customer loyalty myth number four: Giving things away for free equals greater loyalty.

A commonly employed Internet marketing tactic is to give things away for free, either as an incentive to try a product or service, as a reward for purchasing a product or service, or as a means to acquire information that can be sold to advertisers.

There has been no other time in the history of commerce where more products and services have been available to consumers for free. Free Internet services. Free e-mail. Free online photofinishing. Free music. Free shipping. Free disk drive storage. Free, free, free.

(I can just imagine a future where there will be free automobiles for everyone – the NetCar – powered by Yahoo! and camouflaged in the latest detergent packaging colours with a big digital billboard on the roof advertising 1-800 Flowers.)

Unfortunately, more often than not, such giveaways are misdirected and promote the wrong kinds of customer behaviour.

So why are giveaways such a popular tactic?

In my last column, I discussed the concept of ‘stickiness’ as a measure of online loyalty and how it evolved from the need to measure advertising effectiveness. Much like the concept of stickiness, the idea of giving things away online also finds its roots in the early days of the Internet.

Specifically, we can trace the ‘everything that’s worth having can be had for free’ trend to three historical facts:

1) The Internet has non-commercial roots. It is not owned by any one organization (not even Bill Gates) and is essentially a public domain that is loosely regulated by a consortium of various private and government agencies.

2) The Internet was first populated by educational and government institutions, mostly for the purposes of research and information exchange. In fact, the dot-com designation – short for ‘commercial’ – was established to help separate commercial sites on the Internet from educational, government or not-for-profit sites (which are identified as .edu, .gov and .org respectively). Those Internet pioneers strongly resisted the commercialization of the Internet under the freedom of information banner and that legacy of opposition is still in existence today, as evident in services such as Napster.

3) A little software company called Netscape came up with a brilliant new business model based on giving away their browser for free to build market share and thereby create a market for their server software, which they sold for a hefty premium. It was really this third event that created the ‘free’ tidal wave.

So why is giving things away for free such a bad idea?

There are two very strong reasons for avoiding the ‘free giveaway’ approach to building customer loyalty.

The first is that it often attracts the wrong type of customer and promotes what I call ‘hit-and-run’ behaviour. The types of customers drawn to free giveaways are often bargain-seekers and their loyalty will be fickle at best. These types of customers tend to be price-sensitive and will almost always go elsewhere to find the next freebie. And on the Internet, elsewhere is always just one click away.

This situation is exacerbated if the giveaway has no correlation to the product or service being offered. The assumption made by marketers is that the exchange of value between vendor and prospect creates some sort of bond between the two. Not so, in most cases. More often than not, the hit-and-run phenomenon is only amplified – a customer signs up for your product or service to get the free giveaway, never to return after they collect their gift.

In a perfect example, I recall a colleague of mine showing me a new Internet jewelry site that was giving away free pearl earrings to anyone who signed up. The only catch was that you needed to provide them with some personal information, such as your e-mail address.

‘Do you buy a lot of jewelry?’ I asked my colleague.

‘Not in the least,’ he answered.

‘Does your wife like wearing pearls?’ I asked.

‘Not really,’ was the reply.

‘So why did you sign up to get the free earrings?’ I inquired.

‘Because they’re free,’ he said, ‘and I’m curious to see whether or not they’re dumb enough to send me something for free that I would otherwise never buy from them to begin with.’

Point taken.

The second reason why giving things away for free is a bad idea is because, for most businesses, it’s not economical, especially if what you’re giving away is the actual product or service. Typically, this is done in exchange for personal information.

The idea seems sound – provide a free product or service to consumers in order to build traffic online and then sell advertising against the traffic numbers – but it rarely works out for the best.

A recent story in The Economist said it best – Why spend millions to build a product or service, only to give it away for free in hopes of attracting enough customers to profit on the sale of advertising? Isn’t that like selling dollar bills for 90 cents and then making your money on advertising from the impending volume of traffic?

Very few businesses can survive on advertising-supported models – just look at the rash of free ISPs that have shut their doors in recent weeks. Ultimately, there is little correlation between the cost of producing your product or service and the price at which you sell advertising space, the price of which is determined based on supply and demand of ad inventory across the Internet and, to a lesser degree, the demographics of your customers. As a result, businesses have little control of the margins. In the rush to acquire customers, many companies ignore this reality, only to face disastrous losses down the road.

So – if you’re thinking about giving something away as a means to acquiring or retaining customers, think about the business model behind your product or service and whether or not the numbers add up. Or, if you’re planning on giving something away as an incentive to try a product or service, make sure that it promotes the right behaviour – in essence, that the giveaway itself is tied to the purchase of the product or service and ideally, will move an online customer from trial to adoption in the process.

Next month, I will cover myth number five – Do consumers really want a relationship with your brand?

Michael Shostak is president of Vickers & Benson Interactive. He has spent the past 10 years of his life demystifying technology and marketing. For rebuttals, platitudes or other comments, Shostak can be reached at mshostak@vbdi.com or at (416) 480-7978.