Retaining loyal customers in e-commerce - Winning customers is good, but keeping them is better

Contents

Summary

1. Introduction

2. Project description
2.1 Problem definition
2.2 Project assignment
2.3 Objectives

3. Customer Relationship Management
3.1 Customer Relationship Marketing
3.2 Understanding customer satisfaction
3.3 The relationship between satisfaction and loyalty
3.4 Benefits of customer retention
3.4.1 Benefits for buyers
3.4.2 Benefits for marketers

4. The digital age
4.1 E-business
4.2 E-CRM
4.3 Buyer and marketer values
4.3.1 Values to buyers
4.3.2 Values to marketers
4.4 Online customer expectations
4.5 How to retain customers in E-business
4.5.1 Service quality
4.5.2 Database marketing
4.5.3 Personalization by collaborative filtering
4.5.4 Customer integration
4.5.5 Partner programs
4.5.6 Virtual communities
4.5.7 Recovering from service failures
4.5.8 Handling competitive forces

5. Practical application
5.1 Initiation
5.2 Amazon best practice
5.3 Customer retention at Amazon.com
5.4 Conclusion

Bibliography

List of Figures

List of Tables

Appendix 1

Summary

This report is about trying to figure out in how far retention of loyal customers is necessary and possible within the internet market. Within the beginning of the report it is figured out that retaining loyal customers is by far less costly than acquiring new ones. This fact, which is supported by several marketers, leads to the reports topic “Retaining loyal customers in e-commerce – Winning customers is good, but keeping them is better.”

However, the internet marketplace makes it very difficult for companies to retain their loyal customers. Now, customers have the possibility to compare millions of different products and companies in less time. Furthermore, face-to-face contact is reduced to zero, building personal relationships with customers is nearly impossible and the competition is only “one click” away. That is why keeping loyal customers is considerably more difficult than in the traditional marketplace. The primary goal of this report is to figure out in how far online companies can retain a loyal customer base.

Within this report it is figured out that customers need to be satisfied in order to become and stay loyal. That is why the interconnection of satisfaction and loyalty is analysed in detail. Additionally, it is mentioned that satisfaction depends on meeting customers expectations. That is why it is of utmost importance to e-retailers to figure out and understand the expectations of online customers.

Further on, the expectations and values of online customers are pointed out. Based on those expectations several tools and measurements will be presented which should increase the possibility to retain loyal customers. Recovering from service failures and competitive forces as indirect loyalty effectors will also be dealt with.

1. Introduction

Within this chapter a short introduction to the topic will be provided. This chapter also clarifies the motives for executing a research on how to retain customers in e-commerce.

In today’s business there is a shift of many companies away from a transactional mindset toward a relational mindset when it comes to dealing with customers. That is because researches proofed that nowadays for many companies profitability depends on the companies ability to develop and maintain long-term relationships with their clients (e.g. Lemon et al., 2002, pp.1-14). In order to gain a competitive edge, companies need to be customer-driven and able to serve their customers needs. Moreover, companies have to deliver a certain added value to exceed customer expectations and build strong relationships.

However, the emergence of the internet and e-commerce makes it is very difficult for companies to build long-term relationships with customers. By means of the internet the personal contact to customers is abolished and a reduction of transaction costs is enabled, which in turn creates a new set of customer expectations. Therefore, the potential that customers will switch to the competition rises dramatically compared to traditional markets. This is because customers now have access to millions of different companies and they can easily compare different products 24 hours and seven days a week.

In order to maintain strong customer relationships in the internet era the modified customer expectations need to be identified. Companies need to figure out what is influencing the satisfaction of customers and how to create loyalty. Competitive forces have to be considered to safeguard the business success. Furthermore, relationship bonds need to be created based on the customers expectations to encourage customers to remain in a relationship. All of the above will be examined in this report.

Though, this report has several limitations as the concentration will only be on the business relationship of companies and customers (business-to-consumer). Implications of other stakeholders on customer retention will not be dealt with in this report. Furthermore, it should be pointed out that this report is more concentrating on tools and measures to retain customers, in contrast to a technical or IT orientation.

2. Project description

Chapter 2 will start with the problem definition which points out the main problem that the author attempts to answer. Furthermore, the project assignment will be explained and clear objectives will be pointed out.

2.1 Problem definition

In the traditional market, where face-to-face contact is possible, marketers get to know their clients personally. By personal contact, marketers have the possibility to build a personal relationship with their clients, figure out their needs and finally satisfy their needs by personalized services. As a result, customers are likely to stay with a company and the potential that they become loyal increases.

However, as already mentioned in the introduction, the internet marketplace makes it very difficult for companies to retain their loyal customers. Now, customers have the possibility to compare millions of different products and companies in less time. Furthermore, face-to-face contact is reduced to zero, building personal relationships with customers is nearly impossible and the competition is only “one click” away. That is why keeping loyal customers is considerably more difficult than in the traditional marketplace.

All of the above mentioned facts lead to the following problem definition:

Revenues of internet-based companies are unpredictable and not secure at all. There even exists the risk of going bankrupt.

2.2 Project assignment

Given that it can often cost up to eight times more to find and secure a new customer than it does to sell to an existing customer, it is vital for companies to focus on loyal customers. The Pareto 80/20 rule, that 80% of the profit comes from 20% of customers, means that giving more attention to the loyal top 20% will pay huge dividends (Ash & Lambert, 2001, p.63). That is why the research topic should definitely focus on the retaining loyal customers.

The title for this report therefore will be: “Retaining loyal customers in e-commerce”

And the appropriate subtitle is: “Winning customers is good, but keeping them is better”

2.3 Objectives

Based on the problem definition and project assignment the objectives of this report are to:

- Explain how to meet and exceed customers expectations
- Point out why retaining loyal customers is preferable over customer acquisition
- Figure out benefits for marketers and buyers of customer loyalty
- Identify tools and measures for companies to retain loyal online customers
- Give a best-practice example in order to proof the success of some identifies tools

3. Customer Relationship Management

Kotler and Armstrong (2006a, pp.118-119) define Customer Relationship Management (CRM) as follows:

“Customer relationship management manages detailed information about individual customers and customer touch points in order to maximize customer loyalty. Customer touch points include customer purchases, sales force contacts, service and support calls, Web site visits, satisfaction surveys, credit and payment interactions and market research studies. So every contact between the customer and the company.”

The goal of CRM is to “build and maintain a base of committed customers who are profitable for the organization.”(Zeithaml & Bitner, 2000, p.139).

In recent years CRM became one of the most important management tools to increase the profitability of companies. This is related to the following two facts:

- acquiring new customers is more expensive than to enhance the value of existing ones
- repeat purchases by established customers require as much as 90 percent less marketing expenditure (Dhar & Glazer, 2003, pp.86-92).

However, managing customer relationships is actually just one part of the overall relationship management network of a company. According to Hinterhuber (1996, pp.2-3) possible stakeholders include suppliers, employees, competitors, public organizations and customers. The stakeholder relationships are illustrated in Figure 1.

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Figure 1: Stakeholder relationships, own illustration

Since this report only deals with relationship management in connection to customers it has to be mentioned that the other stakeholder relationships will not be dealt with further.

3.1 Customer Relationship Marketing

The basic tool of CRM is Customer Relationship Marketing. Customer Relationship Marketing is so important nowadays because there is a shift in many firms away from an acquisition/transaction focus toward a retention/relationship focus. Customer Relationship Marketing targets the customers who have the potential to become long-term customers. Long-term customers are more likely to purchase additional services and may also help to attract new customers through word of mouth (Ghijsen & Semeijn, 2007, pp.107-108).

Figure 2 (Ghijsen & Semeijn, 2007, p.125), graphically illustrates the phases of Customer Relationship Marketing within CRM by means of a ladder. Every company’s intention should be to move customers up the ladder in order to retain customers and build long-term relationships. It mainly depends on the customer’s degree of satisfaction, trust and commitment to the company, if they will be willing to reach the final stage “Enhancing”. In turn companies need to deliver an added value, as customization, which is appreciated by the customer. Furthermore, companies have to intensify the cooperation with the customers, in order to move customers up the ladder.

illustration not visible in this excerpt

“As customers make the transition from satisfaction-based acquaintanceships to trust-based friendships to commitment-based partnerships, increases are required in both the value received and the level of cooperation.” (Ghijsen & Semeijn, 2007, p.126).

If a company is able to retain customers and even enhances the relationship with them (stage 4) it is unlikely that customers switch to the competition. This is because both parties, the customer as well as the company, will benefit from customer retention. Benefits or rewards refer to worthwhile or valuable outcomes to the participants of the relationship (Nielson, 1998, pp.441-463). The benefits that customers and marketers receive if customers stay loyal will be dealt with later on. First of all it is necessary to have a closer look at stage 2 to understand what satisfies a customer.

3.2 Understanding customer satisfaction

It is generally known that customers have specific expectations about services and products which are offered on the marketplace. Customer expectations are probably the most important determinant of how satisfied the customer will be after the purchase is done. In order to serve customer expectations, marketers need to understand that expectations are derived from several sources (e.g. advertisements, past experiences, recommendations). Furthermore, customer’s satisfaction is dependent on the customer’s perceptions of the quality of a service after a purchase is made.

The relationship between expectations, service performance, and the perception of that performance is all captured in the following equation:

Satisfaction = Perception of performance – Expectation (Ghijsen & Semeijn, 2007, p.102)

By either lowering the customer’s expectations or improving the customer’s perception of performance, companies have the possibility to extend its customers satisfaction. To put the above mentioned equation in words: Whether customers will perceive that they have received the promised value proposition will depend on comparing a product or service’s actual performance in relation to their expectations. If there is a mismatch between what is expected and delivered a service-quality gap exists. Then it is unlikely that customers stay loyal.

The customer perceived value that the online company seeks to create, will influence customer satisfaction. Therefore it follows that the key to generating high customer satisfaction is to deliver high customer perceived value. If a customer is satisfied, he or she will exhibit a higher probability of purchasing products. Additionally, one would expect that this results in high customer loyalty (Lin, 2003, pp.28-29).

“Academic research and corporate experience show that satisfied customers are more loyal, more likely to engage in positive word of mouth recommendations and more likely to buy in the future.” (Freed, 2007, p.5).

3.3 The relationship between satisfaction and loyalty

“Although the terms satisfaction and loyalty are sometimes used interchangeably they do not necessarily correspond.” (Chaffey et al., 2006, p.261). Satisfaction and loyalty need to be distinguished, because satisfied customers in comparison to loyal customers still have a high potential to switch to competitors. That is why just focusing to satisfy customers is not enough. Satisfied customers will only stay with a company until a better alternative is offered by the competition. This is because satisfaction does not necessarily bring along commitment. Satisfying customers without creating an emotional connection with them has no real value to a company (Mc Ewen, 2003, p.2).

However, “as a customers satisfaction with products and/or services increases, so should their behavioural and emotional loyalty” (Chaffey et al., 2006, p.261). If a customer is loyal the potential that the customer switches to the competition is reduced by far. This is because loyalty brings a long several benefits for customers. Those benefits are identified and explained in the Chapter 3.4: Benefits of customer retention.

3.4 Benefits of customer retention

As previously mentioned companies as well as their customers will benefit from customer retention. In the following the main benefits for customers and companies will be pointed out.

3.4.1 Benefits for buyers

In case customers are loyal to a specific company they receive a greater value compared to what they can expect from competing firms. The greater value received can be called customer relational benefits which motivate consumers to engage in long term relationships with companies. Companies do not want to lose loyal customers and therefore offer special conditions, e.g. discounts or individual service, to retain and satisfy loyal customers.

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