Do Discounts Drive E-Commerce?

One of the recurring questions about the burgeoning e-commerce business is how important price is in driving the precipitous growth of online shopping. As I’ve written before–to a chorus of Bronx cheers–the exemption of e-commerce from most state sales taxes means that online shoppers get an immediate price advantage over their nonvirtual counterparts. On top of that nearly every online site offers significant discounts on the goods they sell everyday.

The firmest advocates of the future viability of e-commerce, though, tend to downplay discounting as a significant driver of sales. That’s not exactly surprising: Everyone knows that Ford could sell a lot more cars if it charged 30 percent less for vehicles purchased over the Internet, but everyone also knows that Ford’s profits would quickly evaporate if it did so. So emphasizing the fact that discounting is an integral part of any e-commerce business model isn’t exactly something Internet bulls want to do.

Instead, the bulls tend to emphasize things like convenience, ease of use, customer service, and even community. Now, these things are all wonderful, and certainly sites like Amazon or DVD Express–both of which I use regularly–make shopping a breeze (although I remain unconvinced that signing online, downloading pages, ordering my books, and then waiting four days for them to arrive is more convenient than jumping onto the subway and coming out of Barnes & Noble 30 minutes later with the books I want). And a not insignificant number of consumers live a long way away from a real book or video store–though not enough to make Amazon a $10 billion company. Still, the popularity of a site like Amazon can’t be separated from the fact that you’re getting 20 percent to 40 percent off on almost everything you order.

How could it be separated, after all? Why would Netizens be less price-sensitive than other kinds of consumers? It’s possible that Net users today tend to be disproportionately affluent (since we know that access to technology is affected by class), and therefore more willing to trade price for convenience. But as access to the Net spreads, that will presumably change. In any case, no one is having to trade price for convenience. The cool thing about e-commerce today is, you get both.

The problem, of course, is that while the consumer gets both, the companies aren’t getting any profits. Shopping online is such an odd experience because you know these sites are charging you less than they need to in order to be in the black. They’re continually giving us free gifts in the hope we’ll become loyal customers. But people don’t go to Wal-Mart because they’re loyal to Wal-Mart. They go to Wal-Mart because it’s cheaper and has more stuff than anywhere else. Luckily for Wal-Mart, it’s also profitable.

I’m thinking about all this because of Monday’s announcement that AOL will be buying MovieFone for $388 million in stock. At the moment, MovieFone is primarily a site for movie listings, deriving most of its revenue from advertising. But the business AOL has its eye on is selling tickets to films online (and over the phone). Electronic ticketing is one of those things that people have been plugging for years, but it’s yet to become genuinely popular, even in big cities. And a key reason is price.

If you buy airline tickets online, after all, it doesn’t cost you anything extra. (In fact, Delta wanted to make it more expensive not to buy tickets online.) But if you buy tickets through MovieFone, it costs you on average $1.30 a ticket, which is a markup of somewhere between 15 percent and 20 percent. That’s a huge premium to pay for anything, and while there will always be a market of people who just don’t want to wait in line, the idea that you can construct a business around charging people 15 percent more for a movie ticket seems foolish. More importantly it’s an idea that ignores one of the Internet’s simplest lessons: Price matters.