Carrots in Cyberspace

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Scott Lenet says the idea for Smart Frog, a new online incentive program, struck at 35,000 feet. On a plane last fall, he and friend Peter Bauert found themselves boasting about their copious amounts of frequent-flyer miles. Was there a way, Lenet wondered aloud, to apply the frequent-flyer model and thus reward loyalty on the Internet? After some serious investigation (Lenet has a background in venture capital, Bauert in software engineering), Smart Frog hopped on the Web in February, offering a 5 percent rebate on everything members buy from affiliated online stores, usually retailers. Twice a year, Smart Frog will cut a check for members who want to redeem their "frog dollars." Says Lenet, now co-CEO with pal Bauert of the Austin, Texas-based startup: "Everyone understands the value of cash."

They certainly do, and more Netizens are searching for perks like Smart Frog's to sweeten their time online. Roughly 56 percent of online consumers reported in a Jupiter Communications survey that they would be more likely to purchase from a given e-commerce site if a loyalty program was available. That's good news for online retailers fed up with dismal returns on banner ads and struggling to drive traffic-and sales-to their home page. Some maverick merchants are already building their own in-house loyalty programs; others are dipping in more cautiously by linking with network programs such as Smart Frog. In all, Forrester Research predicts that companies will spend about $6 billion a year on online incentives and promotions by 2002. "Customer retention is the biggest issue right now," says Doug Smooke, manager of marketing services at BrainPlay.com, an e-commerce site for children's products that offers customer perks. "When you've got all sorts of carrots being dangled, it's easy to jump ship."

And there are lots of carrots. Today's online consumers can hoard goodies like free merchandise, frequent-flyer miles, and cash rebates. Of course, they have to do something to get these rewards. At Cybergold, a network incentives program, members earn cash by filling out surveys, reading ads, trying out a particular product or service, and purchasing items from affiliated merchants. The company tailors e-mails about new incentives based on a member's past activities in the program. Willing to sign up for a 30-day trial membership with the American Homeowners Association? Cybergold will pay you $5 if you do. The company's 1.5 million members can spend their greenbacks at the site as well-two months ago, Cybergold launched a section where users can buy small-ticket items (an MP3 music file for $1, for instance) with money they've earned. Members also have the option to take the cash or donate it to their favorite charity.

Merchants are happiest about dishing out perks when people buy stuff at their site. Through its partnership in a network program called ClickRewards, BrainPlay. com offers 600 frequent-flyer miles to customers whose orders total $50 or more. So far, roughly 40 merchants run ClickRewards promos, says Perryman Maynard, vice president of relationship marketing at Netcentives, the San Francisco-based company that operates the program.

BrainPlay.com decided to try the program because of the appealing audience demographics. According to Netcentives, 82 percent of ClickRewards members are between 25 and 54 years old; 62 percent report incomes greater than $50,000. The program reaches 810,000 members today, and there's plenty more to add: 65 percent of frequent flyers, nearly 37 million people, say they surf the Web. Netcentives offers miles for eight of the top ten programs, including American Airlines Advantage and Delta SkyMiles.

So far, BrainPlay.com is pleased with the results. ClickRewards members, Smooke says, spend more than the company's average customers and often surpass the minimum amount needed to qualify for the free miles. Merchants pay Netcentives only when they give out miles; Netcentives buys miles in bulk from the airlines, charges a set price to clients, and keeps the profits.

Still, many e-commerce players, including BrainPlay.com, aren't banking solely on network programs to bring in business. They're devising their own in-house loyalty and incentive offers, pushing promos like "buy three-get one free" and establishing special membership programs to retain customers. Members of the Mobalist Rewards program at autobytel.com, a site that sells cars online, earn cash toward the purchase of their vehicle by spending at cyberstores affiliated with the company. Buy wine at Virtual Vineyards, for example, and get a 5 percent rebate to use toward your new set of wheels.

Whether a merchant is part of a network or blazing its own path to loyalty, it costs money. Which option produces the best return on investment? Jupiter Communications suggests merchants weigh factors such as customer purchasing habits, participation estimates, and program costs to determine ROI for both situations. For now, Jupiter analysts believe commerce players will achieve a higher marginal return from network programs than in-house products. Lower costs and the chance for cross-promotions between affiliates make networks more appealing, the research firm concludes.

But network programs can get expensive, contends Hiten Patel, manager of business development at Sparks.com, a site that sells greeting cards and is a member of Smart Frog and ClickRewards.

Compare the variable costs of a network program, he says, to that of a referral program. Associates of a referral program display a link to the merchant on their Web sites; whenever a customer accesses the merchant through an associate's page, the associate receives a commission from their purchase. Sparks.com associates receive a 20 percent commission, Patel says. It's usually a one-time commission, he adds, because the next time that customer wants to shop at Sparks.com, he'll go there directly. "You can give a 100 percent commission if you think you can keep that customer for life," Patel says. Customers who are members of a network program, however, cost the merchant every time they buy something because of the incentives attached to the purchase.

Web-based loyalty programs are not limited to cyberspace-only merchants. Louis Blatt, a partner at consulting firm Arthur Andersen, says bricks-and-mortar companies also need to leverage the Internet to offer value-added services to their customers. "Doing business with your customers is no longer dependent on the physical asset, like a store or hotel," he says. "The Internet needs to be handled as another touchpoint." Still, Blatt comes up empty when asked for examples of companies with strong loyalty programs on- and off-line. "There's no one yet combining physical and virtual loyalty programs to offer increased value to their company as well as to the consumer," he says.

For now, smart online consumers can score some very good deals. Stop by themall.earthlink.net, for instance. Music Boulevard, a store at the online mall, promises one ClickRewards mile for every dollar shoppers spend there. Meanwhile, Earthlink-the Internet service provider that runs the mall-recently joined with Cybergold to market a credit card that gives cash back on all purchases, including those made at the mall. The rebates appear in the cardholder's Cybergold account. Swipe your Earthlink credit card at Music Boulevard and get double the return: money in your Cybergold account and miles in your ClickRewards account. Race you to the mall.

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