Now is the price right?

We're not talking about diamonds and Audis. E-tailers across the board are dismissing the low-price strategy as a failure.

Surprisingly, shoppers haven't been scared off by the increases, nor have they taken their business elsewhere on the Web. "We did a study on customer loyalty and found that highly price- sensitive customers tend not to be loyal," says Sean O'Neill, an analyst with e-commerce consultants Mainspring. "Although a number of customers are shopping for lower prices, the most loyal are the ones that are looking for convenience and depth and breadth of product offering."

A great example is Books.com, a discount bookseller that underpriced Amazon.com in more than 99 percent of its product offerings before being acquired by Barnes & Noble. Regardless, Amazon.com commanded 80 percent of the market. "E-tailers like Amazon.com have established such a brand name for themselves by providing great fulfillment, ease of ordering, and general customer service that customers do remain loyal. Thus it's enabled e-tailers to charge higher prices based on that confidence level," says O'Neill.

Says Amazon.com spokesperson Patty Smith, "A lot of companies are discovering that they can't sustain the lowest-price business model because they're just getting customers interested in the lowest possible price. Those customers are going to be very fickle."

A Drugstore.com spokesman says his company had the same experience. Since raising shipping prices in the spring of 2000, the company hasn't seen any fallout. "We basically had no reaction from consumers, and believe me, they watch those kinds of things very closely," says Mike Concannon, vice president of merchandising.

Bye-Bye Bargains?

Does that mean the death of online bargains? No, but the deals won't come in the form of the blanket markdown sales of the last few years. Instead, O'Neill says, he believes e-tailers will become choosier about which customers get access to the best deals under a practice known as dynamic pricing. "I think discounts and specials will be offered more from a customer service perspective than from a pricing perspective," says O'Neill. "Especially with the growth of customer relationship management, segmenting your loyal customers to make sure you're offering them incentives to continue buying is going to be the key to the future."

However, dynamic pricing is tricky, as Amazon.com discovered last September when several customers chatting online found they were being charged different prices for the same DVD. Explaining the discrepancy as "price testing," Amazon.com has vehemently denied the company would ever play favorites. "Like all of your retailers, we try to determine to what [degree] price will determine a person's purchasing decisions, but varable pricing is not something Amazon.com has ever done or will ever do," says Amazon.com's Smith.

The backlash against dynamic pricing suggests that online companies cannot take customer loyalty for granted. Clearly, consumers have drawn a line based on their e-tailer expectations, and dynamic pricing crossed that line. These issues come at a crucial time when brick-and-mortar retailers like Wal-Mart are finally entering the online arena. "The landscape is changing dramatically, in that a lot of our pure-play competitors are withering or are now gone. Now we have the big boys coming online: Wal-Mart, Walgreens, Target," says Drugstore.com's Concannon. "Obviously, there is the expectation on the Web that you're going to get a value over brick and mortar, so we are constantly reevaluating our pricing."