As the potential for heavy shakeouts haunts the e-commerce sector—and gives Wall Street the heebie-jeebies—more people are wondering what it’s going to take to make a successful commercial web site: one that will survive the coming turmoil, one that has the look of a site worth using and, needless to say, advertising on.
     A new study has come out that may have some answers.
    The study, from Mainspring, an internet strategy consulting firm, and Bain & Co., a management consultant, found that customer loyalty is the key driver of profitability for e-commerce sites.
      "Small changes in loyalty alone, especially among the most profitable customers, can account for the long-term divergence of initially comparable online companies," the study reports.
     Customer loyalty is crucial to online retailers because the study says that e-commerce sites actually lose money on one-time and even two-time customers.
     "Web sites have to make sure that they keep customers and retain them over time," says Julian Chu, director of eStrategy for Mainspring. "You will lose money if you can’t get them to come back. There’s no two ways about it."
     The study examined three specific areas of online retailing: apparel, consumer electronics and groceries.
     In the apparel segment, the study found that web sites can’t begin to break even on customers until they’ve been shopping at the site for 12 months.
     In online groceries, the break-even point is actually 18 months.
     Except for high-ticket items, the study concludes, it’s impossible for online retailers to make money on shoppers who use their sites only once.
     High customer-acquisition costs make this a reality. But the other important thing the study found about repeat shoppers is a definite trend to continue to spend more money with each visit.
     For apparel sites, the study found that the average repeat customer spends 67 percent more in months 31-36 of his or her shopping relationship than in the first six months. These higher spending levels were the result both of shopping more often at the sites and spending more money per visit.
     The study found that an apparel shopper's fifth purchase was 40 percent larger than his or her first, while the tenth purchase was nearly 80 percent larger than the first.
     But loyal customers have another value to web sites.
     "A lot of people don’t think about this, but the value of loyal customers is not only in how much they spend with you but that they generate referral business over time," says Chu. "And the impact grows over time. The more loyal they are, the more they refer to you."
     For instance, in the apparel segment, the study found that each shopper referred three people to a site after his or her first purchase. By the shopper’s tenth purchase, he or she had referred seven people to the site. Among consumer electronics shoppers, the number of referrals was up to 13 after 10 purchases.
     What drives customer loyalty, says Chu, are the basics: dependability, customer service and fair price. "It’s not just about the rock-bottom low price," he says.
      And yet of course customer loyalty isn’t a silver bullet. CDNow has loyal customers but right now it’s not doing them that much good as the online music seller is in a cash crunch that may lead to bankruptcy unless it finds a buyer.
     "There still is the fundamental question of whether your business model is sound," notes Chu. "After all, if you give all your products away, you’ll have a lot of loyal customers, but you won’t have a profitable business."

-Jeremy Schlosberg is the senior editor for new media.

              
                         Cover Page | Contact Us