Customer Loyalty Key to E-Commerce Profitability

Customer loyalty, measured in repeat purchases and referrals, is the key driver of profitability for online businesses, even more so than for offline companies, according to a series of joint studies in online retail by Bain & Company and Mainspring.

According to the research, the more often a customer visits a site, the more likely that customer will spend an increasing amount of money and generate more profits for the online retailer. For example, in apparel, the average repeat customer spent 67 percent more overall in the third year of his or her shopping relationship with an online retail vendor than in the first six months. And, over three years, customers referred by online grocery shoppers spent an additional 75 percent of what the original shopper spent.

The study surveyed Web shoppers within industry sectors including apparel, groceries, and electronics. Given the high cost of acquiring customers, the results show that for e-tailers to recoup that investment, they need to convince customers to return to their site again and again. The study found that the average online apparel shopper was not profitable for the retailer until he or she had shopped at the site four times. This implies that the retailer has to retain the customer for 12 months in order to break even.

The findings also found that loyal online customers, just like offline customers, spend more, refer more people and are more willing to expand their purchasing into new categories. Furthermore, online retailers, in most industries, must provide customers with fair, but not necessarily the lowest, prices.

"Delighting customers is the clear determinant of e-business success or failure. Online shoppers want their lives to be made simpler with the offline world as their benchmark," said Chris Zook, Head of Bain & Company's E-Commerce Practice. "For the most part, their needs are fairly simple: good secure service, fair pricing and timely fulfillment. The few companies that succeed in these areas have significant competitive advantages over their competitors and a business model that, in the long run, is best positioned for long-term success."

Although much attention has been focused on site design and infrastructure, making room in the budget for customer retention tools is a must for companies to become profitable.

"Investing in customer retention is perceived as less glamorous than investing in slick Web site design, but unless companies can turn eyeballs into repeat customers, they don't have a viable business. Customer retention requires ongoing commitment not only must retailers aggressively acquire customers, but they must also be committed to investing in superior customer service and fulfillment capabilities," said Randall Hancock, Senior Vice President of eStrategy for Mainspring.

According to a report by Forrester Research, the success of early e-commerce has made Web site availability and performance mission critical, but customer satisfaction through other means must soon take shape.

The Forrester report, "Is Nonstop Enough?," predicts that sophisticated online firms will eventually cap infrastructure spending and use the money to improve overall customer satisfaction because e-commerce sites will soon reach a point of diminishing returns. Prior to transacting, Forrester says companies should apply load and usability testing to their site design to improve a visitor's experience. In addition to focus groups, rigorous Web site reviews, and usability-lab studies, firms that improve design and navigation functions will boost end-user satisfaction. Companies must provide shoppers with intuitive navigation and make it easy for returning customers to purchase quickly, according to Forrester.

Speedy and efficient transactions, a firm's ability to check inventory, and order tracking canimprove the customer experience significantly. A positive consumer experience is also based upon merchandise delivered on time, which requires end-to-end logistics that provide service continuity from purchase to delivery. After a transaction, Forrester found companies must layer people and business incentives on top of technology to maximize customer retention. Customer service initiatives, including quality personal attention, coupons, or special discounts, also make up for inconveniences caused by technology.

"Although Internet companies today garner high valuations due to the large number of Internet buyers, market share will eventually diminish," said Joseph Butt, Jr., senior analyst at Forrester. "Acquiring new customers in 2004 will require millions. The best bet for online companies is to dazzle customers with a quality shopping experience now, before it's too late."

Other findings from the Bain & Co./Mainspring research include:

• Online retailers lose money on one-time shoppers: Online grocers, for example, have to retain customers for 18 months just to break even
• Repeat purchasers spend more over time: In groceries, customers spent 23 percent more in months 31-36 than in the first six months
• Positive word-of-mouth is a powerful way to acquire new customers: On average, each apparel shopper referred three people to an online retailer's site after his or her first purchase. After 10 purchases, that same shopper had referred seven people to the site. For consumer electronics, the average customer had referred 13 people after 10 purchases.
• Treating customers as assets, not transactions, improves loyalty: Improving customer loyalty requires a fundamental shift in mindset. Customers are not transactions, and capturing their long-term business requires earning their trust and consistently providing them real value and convenience.
• Measuring customer retention and customer satisfaction along key retention drivers will illuminate areas that need to be improved: Understand which customers are repeat versus one-time shoppers, then identify the factors that are important to customers and measure satisfaction.

Bain and Mainspring's analysis suggests that online retailers that succeed in building customer loyalty can be more profitable than online competitors that focus only on transactional metrics such as number of visitors, number of shoppers, and number of eyeballs. Bain and Mainspring surveyed more than 2,000 online customers across three retail sectors for the study.