The shift away from free in online photo

In search of better margins, big brands are moving away from regular discounts

There’s no question the online photofinishing market is becoming mature, as print volume shifts to mobile and, particularly, to apps. In recent earnings reports, some big brands indicated a move away from free offers to improve margins. Understandably, they are taking a hit on volume but are reaping margin increases.

In Shutterfly‘s earnings call last week, CEO Christopher North told analysts, “While Shutterfly Consumer segment growth was below our expectations driven by a mix shift away from free promotions and towards paid higher value purchases, we’re pleased with the continuing improvements in the business.

“While free promotions can play a useful role in engaging customers and in driving strategically valuable actions such as customer acquisition to our app, they come with trade-offs against the quality of revenue, brand positioning, and customer behavior. Over the last three quarters, we’ve begun to reduce the mix of revenues from free promotions and expect to limit their use over time to situations where they help us acquire customers cost-effectively or increase customer lifetime value. The trend away from free accelerated more than expected in Q2 both because of the actions we took to reduce the free mix, but also because we’re seeing customers responding less to free promotions.”

Note what North said: “customers responding less to free promotions.” When giveaways and freebies are the only tool in a marketers bag, its difficult to sustain growth, in the absence of unique selling propositions. Freebie fatigue is real.

“As a result, Shutterfly.com revenue from free products in Q2 declined 11% year-over-year, while revenue from paid products increased 17%, and the mix of revenues coming from paid increased from 81% last year in Q2 to 85% this year in Q2,” added North. “These figures are for Shutterfly.com as a whole and include the Tiny Prints boutique and incremental revenue from shuttered websites. We regard this as a positive shift in that it reduces our reliance on our most aggressive promotions, improves the quality of our revenue, and protects our premium brand position. However, it does have a near-term impact on headline growth in Q2 and we expect it to do so again in Q3.”

In response to an investment analyst question, North said noted Shutterfly is not completely walking away from free promotions, but will reduce reliance on them as a customer-acquisition tool: “There is a role for free where it drives strategically valuable actions by customers, where it helps us acquire customers also cost-effectively or it drives increased lifetime value for customers. But, frankly, we think … we allowed [the free mix] to get too high in the past, and so we think it’s the right thing to do to reduce it.”

At the other end of the value spectrum, Cimpress‘ Vistaprint unit – known for giving away product to acquire customers – has also backed away from free offers, according to this chart in the company’s annual report:

Mobile motions

As for mobile, Shutterfly’s North says the company continues to revise and enhance its mobile offering, which is paying off with greater usage: “Mobile continues to grow strongly with mobile purchases increasing 410 basis points year-over-year to 29% of Shutterfly brand revenue. We continue to expand the range of products available in the app, adding 13 products in the second quarter, which helps drive higher mobile average order value. In the second quarter, we had over 1 million app downloads and continued to see a high install-to-first order ratio and attractive customer acquisition costs. We also further enhanced user experience with features such as intuitive inline text editing, push notifications alerting a customer when an order has shipped, a new countdown timer for upcoming events such as Mother’s Day and a made for Samsung variant of the Shutterfly app that is a special offer for Samsung users and it’s distributed via their app store.”