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Christmas Gift Guide
Tech Industry

Latest salvo in Net sales: free shipping

Despite already razor-thin profit margins, the company will eat the cost of shipping in hopes of improving customer satisfaction.

In online retailers' struggle to survive on ever-shrinking margins, Cyberian Outpost has upped the ante by offering to pay for overnight shipping anywhere in the United States.

The computer products site will swallow the cost of overnight shipping, which starts at several dollars per item in an attempt to dispel consumer confusion about the actual cost of its products, the company said. The TruePrice policy, which Cyberian Outpost said will not result in price increases, took effect today.

In the highly competitive world of PC and software sales, the Internet has been a particularly brutal arena, and Cyberian Outpost chief executive Darryl Peck said the move is as much a way to build market share as an attempt to improve customer satisfaction. Some retailers have complained that aggressive pricing measures by competitors such as Onsale and Buy.com are shrinking already small margins. On top of that, they allege, the "low-price leaders" heap exorbitant shipping and transaction charges onto an item's price.

The TruePrice policy will shave anywhere from $6 on a piece of software to ten times that to ship a computer. According to Forrester Research analyst David Cooperstein, Cyberian Outpost may be able to make some of that cost up by negotiating better fees with shipping companies such as Federal Express.

A quick check of several online retailers showed a wide disparity in overnight shipping charges. For overnight delivery of a laptop computer to San Francisco, for example, Buy.com charges $52.96 on UPS, while Onsale charges $52.50. But at Egghead.com, the quoted cost of overnight delivery was $24.99.

"The delivered cost [of a product] from a lot of the cutthroat retailers is higher than what we charge," Peck said. "Our game is service, not lowest price, and when you look at the costs of products we do end up being the low-cost provider."

Cyberian Outpost is hoping that its customer service, which now includes 24-hour phone response, will keep customers from being lured away by the prices offered on other sites, even after comparison shopping. It's a strategy shared by competitor Egghead.com, which promises no wait times for customer service calls, according to chief executive George Orban. "In the retail business, nobody lets you be cheapest for an extended period of time," Orban said.

Cyberian Outpost lost $25 million last year, so the potential for further erosion of its margins may not go over well on Wall Street. A similar free shipping offer at Egghead.com during the Christmas shopping season cut almost three percentage points off the company's gross margin in the third quarter. But Peck says Cyberian Outpost has done the math and "we can express a very strong, reasoned approach to doing this."

With investor optimism about e-commerce at the present lofty level, pressure on margins may not, in the end, determine whether a company will be a success on Wall Street. Shares of online computer retailer, Value America almost doubled on the day of the company's recent initial public offering, despite "small or sometimes negative product gross margins" the company warned about in filings with the Securities and Exchange Commission.

Ultimately, however, "this environment favors those companies that can afford to sacrifice short-term margins and profitability for rapid growth," Onsale CEO Jerry Kaplan said. Onsale has no intention of losing the battle for market share, he added.

Eventually, online computer retailers may have to turn to one another to keep cutting costs, according to Cooperstein. "Once this wave of paying for non-performance is over, there will be a lot of consolidation," he said.