E-commerce firms step back from early strategies

Last week, eToys sharply scaled back its affiliates program, eliminating commissions on sales and paying business partners only one time for a customer referral.

Analysts say eToys' move represents the next step for many big sites: dropping contracts they once depended on to get off the ground because they became big enough to draw their own repeat customers.

"(Affiliate programs) were typically a starting point for new companies," Gomez Advisors analyst Liz Leonard said. "But as the brand becomes better known among consumers, it's money that eToys and many other e-commerce companies don't need to spend."

There are some unhappy partners as a result of eToys' decision. After steering customers to eToys, some affiliates say the cutoff feels like a betrayal.

"It was unbelievable," said Joe Tracy, the publisher of Animation Artist Magazines. "I couldn't believe a company would punish the people who send them business. For them to go and do this to our affiliates, it's saying, 'Thanks, we're not going to reward you anymore,' and for us, that's the same thing as saying goodbye."

eToys refused to say how many affiliates are affected by the cuts and how much money it has spent on the program.

The Santa Monica, Calif.-based company, now the largest online toy merchant, paid firms $5 for each customer who clicked a link to eToy's site and made a purchase. The company also paid a commission of between 5 percent and 12 percent on items purchased by the customer.

eToys has cut off the commission but is increasing the initial payment to $10 for new customers.

Amazon.com introduced the now widely used affiliate programs in 1996. Amazon pays associates 15 percent commission for every book an affiliate's customer buys. After that, it pays associates a smaller percentage for each of the customer's subsequent purchases.

Spokesman Bill Curry said Amazon has no plan to change the program, which it used to build a huge network. The program now has 430,000 members.

But skyrocketing customer acquisition costs have eroded profit margins for many e-commerce companies, which have spent lavishly on expensive ad campaigns. Now the focus is on controlling costs and making profits.

"Affiliate programs were a great deal in the beginning," said Dan Ries, vice president of equity research at C.E. Unterberg Towbin. "Companies didn't mind paying 10 percent commissions to obtain new customers. It was cheap. But if you have to keep paying on repeat sales, well, that can be painful."

eToy officials say cutting off the commission wasn't a cost-saving measure for the company, whose stock has dropped from a high of $86 in October to its current price of less than $12.

It just wasn't in eToy's interest to keep paying affiliates for repeat sales when customers are returning to the site because they like it, said Peter Brine, the director of online marketing.

Analysts agree that while affiliates send potential customers to a site, it is up to the e-commerce company to offer enough service and value to create repeat customers.

"eToys continues to offer superior products and search tools and greater content that would lead customers to return on their own," Leonard said. "The message is eToys is attracting and keeping customers in its own right."

Commission can also cut deep into profits, which may be acceptable to a fledgling company eager to attract new customers, but isn't for a company with an established customer base, Ries said.