Online bargains vanishing amid e-tail shakeout

Pressed by impatient investors to post profits, a number of high-profile e-tailers have raised their prices in recent months. Although the new, higher prices could shore up profit margins, they could also send shoppers elsewhere, even back to their neighborhood stores.

Online merchants "are consciously raising their prices," said Mike May, digital commerce analyst at Jupiter Communications. "Most of these companies have run out of free lunch to give consumers."

The price increases are showing up everywhere from Amazon.com to Petsmart.com. And they are coming in different forms: from smaller everyday discounts and higher shipping costs to promotions targeted not at the masses but to companies' best customers.

The price increases mark a dramatic change for e-commerce. Last year, many e-tailers tried to lure customers with free shipping, holiday coupons and promotions. Even earlier this year, big-name e-tailers such as Pets.com and Drugstore.com were offering $10 discounts to customers on anything in their stores, meaning that customers could get $10 worth of goods for just the price of shipping.

But the bear market for e-commerce stocks has forced a change. With investors increasingly unwilling to fund continuing losses, companies are being pressured to turn profitable--quickly. One strategy is to raise prices, analysts and insiders say.

The depressed market also has caused many companies to close shop, unable to secure new funding. With less competition, the survivors have more flexibility to raise prices without worrying as much about losing sales to rivals with lower prices.

"Sanity is coming to online businesses," said Gomez e-commerce analyst Barrett Ladd. "They're realizing the fact that these companies need to make a profit on their customers."

One e-tail area that has been marked by heightened competition--and rampant pricing wars--is pet supplies. Last year, four well-funded players vied for the hearts and wallets of pet owners. Although each tried to differentiate itself in its own way--Petstore.com allied with the Discovery Channel, for example--they each ended up competing on price. When they filed to go public last spring, at least three of the e-tailers--Pets.com, Petopia.com and Petsmart--were selling and shipping products on average well below cost, leading to huge losses.

But the online pet supply market has changed in recent months. In a move to save some of its dwindling cash, Amazon-backed Pets.com moved part of its operations from San Francisco to Indiana earlier this month. Meanwhile, both Petopia and Petsmart have postponed initial public offerings, and Pets.com bought Petstore in June, days after Petstore laid off part of its staff.

These changes have meant fewer "crazy promotions" by the pet supply e-tailers, said Tom McGovern, chief executive of Petsmart. Instead of offering customers deals such as free shipping for any size order or selling products well below cost, all three sites have raised their shipping fees and are offering discounts only to customers who buy a certain amount of goods or who buy higher-end products.

McGovern attributes the big discounts to the funding that companies received from venture capitalists and to the advice companies were given to "get big fast." Those days are over, he said.

"People are trying to grow their business in much more rational ways," he said.

Away from the bargain barrel
E-tailers in other industries are also trying to encourage shoppers to be loyal to their stores and not to the lowest price.

Amazon rival Buy.com, which once promised the lowest prices on the Web, has told analysts and consumers in recent months that it plans to raise prices on its products and move away from competing solely on price.

Last week, Reflect.com, a Procter & Gamble-backed beauty e-tailer, told customers in an email that it would be raising prices on its customized beauty products. Raising the prices will allow Reflect.com to maintain services such as personalized beauty products and a free "concierge service" that answers customers' beauty questions, chief executive Ginger Kent said.

Previously priced at the low end of comparable products in offline department stores, Reflect.com's new prices will put it toward the midrange of department store prices.

"We have a certain level of service we want to provide people," Kent said. "We made a conscious decision not to diminish any of the service benefits we offer people and still have a healthy, strong business going forward."

But this renewed focus on the bottom line comes as many consumers have grown accustomed to discounted products online. Price-savvy shoppers frequent Web message boards such as those offered by MyCoupons.com or DVD Talk, looking for news on the latest discounts and often exchanging coupon codes.

Many of these consumers say the higher prices will lead them to take their business elsewhere--or to wait for the occasional promotion.

Scottsdale, Ariz., resident Max Armstrong, for instance, said he spends about $150 a month on DVDs, mostly from Buy.com and CheckOut.com. He said he generally has avoided the higher costs at Amazon--but ordered from the Seattle company recently because a glitch drastically reduced prices.

"It was a chance to get the things I wanted and pay a great price," he said.

Armstrong is not alone in shopping for bargains. McGovern, for instance, said that about one-third of Petsmart's customers use coupons on the site, a number he said is low compared with other e-tailers.

Jupiter's May said many e-tailers took a page from the brick-and-mortar predecessors and experimented with "loss leaders," selling some products below cost to draw customers into the store. But the e-tailers found those experiments ineffective.

"The result is that many merchants acquired 'cherry pickers,' customers that would swoop in to buy discounted products and then swoop out without buying anything else," May said.

Building brand loyalty
Despite the recent closures of several online stores, this so-called cherry picking could continue. Many online stores remain open for business; a better bargain is often only a click or a URL away. And if prices get high enough, customers can always return to their local stores.

But analysts and insiders say raising prices is the right course. Although some bargain shoppers may jump at the better deals, many more will stick with the well-known brands, they say.

The top three online stores that DVD Talk members shop at are Buy.com, Amazon and DVD Express, said DVD Talk founder Geoffrey Kleinman. Although other sites often offer better deals, those three sites seem to attract the bulk of sales from DVD Talk customers, he said.

"The smaller sites that don't have established brands, even if they have comparable or lower prices, don't always get the sale," he said.

Kleinman added that even if online stores drive away some customers with higher prices, they can count on the thousands of new online shoppers who have not been conditioned to expect great deals online.

Just because companies are raising prices does not mean discounts will go away, May said. Although they need to raise prices to make money, Internet e-tailers still hold the promise of providing products at lower costs than their brick-and-mortar brethren.

"What proves to be a profitable price online will prove to be a lower price than what a product sells for offline," he said. "The deals consumers will ultimately expect to receive online will be a good value, but not the obscene discounts they are receiving today."

The increased prices are about cutting losses and focusing on profitable customers, May and others say. McGovern said Petsmart makes 90 percent of its revenue off the two-thirds of its customers who don't use coupons.

"You do run the risk of forcing people to shop in the real world," McGovern said. "But you have a healthier company at the end of the day."