Customer retention management in E-commerce

For an e-commerce site, customer retention has two distinct goals:

  1. To retain customers of the organization (repeat customers).
  2. To keep customers using the online channel (repeat visits).

These are similar to the two aims of customer acquisition as described in a previous section. Ideally marketing communications should address both aims.

Maintaining online customer relationships is difficult. Laurie Windham (2001) says:

That’s what’s so scary about customer retention in the online space. We’ve created this empowered, impatient customer who has a short attention span, a lot of choices, and a low barrier to switching.

To create long-term online customer relationships that build on acquisition, to retain and extend, we need to analyse the drivers of satisfaction amongst these e-customers, since satis­faction drives loyalty and loyalty drives profitability. The relationship is shown in Figure 9.15. The objective of marketers is to drive customers up the curve towards the zone of affection. However, it is worth remembering that the majority are not in that zone and to achieve reten­tion marketers must understand why customers defect or are indifferent.

It follows from Figure 9.15 that we need to understand different factors that affect loyalty. The type of approach that can be taken is highlighted by Reichheld and Schefter (2000). They reported that Dell Computer has created a customer experience council that has researched key loyalty drivers, identified measures to track these and put in place an action plan to improve loyalty (Table 9.4).

Since quality of service is so crucial in determining satisfaction and loyalty, see the Focus on excelling in e-commerce service quality section later in this chapter.

Now let us consider key e-marketing tools that help retain customers. Repeat visits can be generated by a variety of means and brainstorming sessions can help generate these. Often it may simply be the expedient of regularly updated market and product or technical information that helps customers perform their day-to-day work. Such information can be delivered through extranets such as Dell Premier or through personalization services such as that described for RS Components. Information to help people perform their work is the propo­sition of the vertical portals such as industry-specific sites. Online communities are popular for both consumer and business markets since users can discuss topical issues or ask for answers to their queries. For example, the UK Net Marketing Group at www.chinwag.com discusses the benefits of new technologies such as mobile commerce and recommends suppliers of Internet services. Many such communities work because they are independent of suppliers, so it may be difficult to introduce these types of facilities on to a corporate site. Finally, traditional sales pro­motion techniques translate well to the Internet. RS Components use Product of the Week or Month to discount some items and offer competitions and prize draws to encourage repeat visits. These are often publicized in offline mail-outs to encourage repeat visits.

1. Personalization and mass customization

The potential power of personalization is suggested by these quotes from Evans et al. (2000) that show the negative effects of lack of targeting of traditional direct mail:

Don’t like unsolicited mail… haven’t asked for it and I’m not interested.

(Female, 25-34)

Most isn’t wanted, it’s not relevant and just clutters up the table… you have to sort through it to get to the ‘real mail’.

(Male, 45-54)

It’s annoying to be sent things that you are not interested in. Even more annoying when they phone you up … If you wanted something you would go and find out about it.

(Female, 45-54)

Personalization and mass customization can be used to tailor information and opt-in e-mail can be used to deliver it to add value and at the same time remind the customer about a product. ‘Personalization’ and ‘mass customization’ are terms that are often used interchangeably. In the strict sense, personalization refers to customization of information requested by a site customer at an individual level. Mass customization involves providing tailored content to a group with similar interests. An example of mass customization is when Amazon recommends similar books according to what others in a segment have offered, or if it sends a similar e-mail to customers who had an interest in a particular topic such as e-commerce. This approach is sometimes also referred to as ‘collaborative filtering’.

All these personalization techniques take advantage of the dynamic possibilities of web content. Users’ preferences are stored in databases and content is taken from a database. Per­sonalization can be achieved through several dynamic variables including:

  • the customers’ preferences
  • the date or time
  • particular events
  • the location.

Personalization can also be used to offer innovative services. Online bookseller BOL (www.bol.com) allows customers to choose their favourite parts from different types of travel guides, perhaps history from the Rough Guides and maps from the Lonely Planet, but excluding night clubs and restaurants. The personalized book can then be printed on demand on the customer’s printer.

A more typical personalization service is that provided by the portals such as Google, Yahoo! and NetVibes. These enable users to configure their home page so that it delivers the information they are most interested in: perhaps their regional weather, the results from their soccer team and the prices of shares they have purchased.

Turning to negative aspects of personalization, there are two chief difficulties. First, cost, for the reasons explained in the next section and, second, it may act as a barrier to users. For example, some personalization requires the user to log in. This may be a problem if a cus­tomer has mislaid a password. Equally, for a new visitor to the site the need to apply for a password can be offputting and a customer may disappear, never to return. Effective person­alization will still enable a new visitor to view a good deal of content even if they do not have a password. Use of cookies can avoid the need for the customer to actively log in, with this occurring automatically.

1.1. Creating personalization

Personalization of web content is much more expensive than developing static content, since it requires database integration and specialized software tools such as Omniture Test and Target, which recognizes visitors when they return and then accesses and displays the rele­vant information from a database.

1.2. Extranets

Extranets were introduced in Chapter 3. Since they require a user to log in they signify dif­ferential services through premium content and services. Many options are possible. A dynamic example of using an extranet is the use of the web to host online events that mirror traditional events such as seminars, trade shows and user group conferences, virtual semi­nars with a guest speaker by webcast, virtual trade shows where exhibitors, seminar speakers and delegates are linked by the web. Dell Computer has a special brand variant known as Dell Premier that can be used to provide value-added services for key accounts. Other tra­ditional retention methods such as loyalty schemes and sales promotions translate well to the online environment.

The use of extranets presents a barrier to entry, particularly if users lose their passwords. To limit this effect RS Components sends out password reminders to help retention. A Dutch insurer combined online and offline techniques to use an extranet to deliver mass customization. Existing customers were divided into six segments and then contacted through a direct mail campaign. Members of each segment were given one of six passwords, so that when they accessed the extranet there were six different versions of content for the web site giving product suggestions and offers consistent with the segment. Extranets pro­vide good traceability of marketing outcomes and tagging of visitors. In this case the effectiveness of the campaign in terms of response rate from the e-mail and conversion to sales could also be monitored for different segments.

1.3. Opt-in e-mail

Opt-in e-mail is vital in communicating the retention offers either through regular e-mail communications such as a newsletter or higher-impact irregular e-mail communications such as details of a product launch. Remember that e-mail has the power of traditional push communication. It enables a targeted message to be pushed out to a customer to inform and remind and they are certain to view it within their e-mail inbox; even if it is only deleted, it cannot be ignored. Contrast this with the web – a pull medium where customers will only visit your site if there is a reason or a prompt to do so.

Despite its potential, use of e-mail for marketing has negative connotations due to spam. Spam is best known as tinned meat, but a modern version of this acronym is ‘Sending Per­sistent Annoying e-Mail’. The negative perception of e-mail derives from the many unsolicited e-mails we have all received from unscrupulous ‘get-rich-quick merchants’. The spammers rely on sending out millions of e-mails in the hope that even if there is only a 0.01 per cent response they may make some money, if not get rich.

Many anti-spam activists have formed organizations such as CAUCE (the Coalition Against Unsolicited Commercial Email, www.cauce.org). These organizations take a dim view of commercial organizations that send unsolicited mail and prepare a list of all spam perpetrators. They have also been successful in creating legislation to outlaw spam. It is now illegal within Europe, but it is often difficult to trace the originators of spam since they use hijacked e-mail addresses and postal boxes to collect their money.

Spam does not mean that e-mail cannot be used as a marketing tool. As explained in the section on permission marketing, opt-in is the key to successful e-mail marketing. Before starting an e-mail dialogue with customers, according to European law, companies must ask customers to provide their e-mail address and then give them the option of‘opting in’ to further communications. Ideally they should proactively opt in by checking a box. E-mail lists can also be purchased where customers have opted in to receive e-mail.

Once an e-mail address has been collected, managers must plan the frequency of e-mail communications. Options include:

  • Regular newsletter type. For example, once a day, once a week, once a month. It is best if customers are given choice about the frequency.
  • Event-related. These tend to be less regular and are sent out perhaps every three or six months when there is news of a new product launch or an exceptional offer.
  • E-mail sequence. Software can be purchased to send out a series of e-mails. For example, after subscription to a trial version of an online magazine, e-mails will be sent out at 3, 10, 25 and 28 days to encourage a subscription before the trial lapses.

2. Online communities

Community implemented as forums and social networks is a key feature of the new interac­tive media that distinguishes them from traditional push media. But why is community important and how can companies best tap into it? Hagel and Armstrong (1997) say:

The rise of virtual communities in online networks has set in motion an unprecedented shift from vendors of goods and services to the customers who buy them. Vendors who under­stand this transfer of power and choose to capitalize on it by organizing virtual communities will be richly rewarded with both peerless customer loyalty and impressive economic returns.

What is the reality behind this vision? How can companies deliver the promise of com­munity? The key to successful community is customer-centred communication. It is a customer-to-customer (C2C) interaction. Consumers, not businesses, generate the content of the site, e-mail list or bulletin board. Its success and essential power can be gauged by the millions of customers who used Napster and Gnutella to download MP3 music files using the original peer-to-peer (P2P) approach and the continued use of BitTorrent. As well as these high-profile examples of successful C2C community there is also often untapped potential for applying community on any organization’s web site. Remember that the C2C approach can be integrated into B2C and B2B sites.

Depending on market sector, an organization has a choice of developing different types of community for B2C, and communities of purpose, position, interest and profession for B2B.

  1. Purpose – people who are going through the same process or trying to achieve a particular objective. Examples include those researching cars, such as Autotrader (autotrader. co.uk), or stocks online, such as the Motley Fool (www.motleyfool.co.uk). Price or product comparison services such as MySimon, Shopsmart and Kelkoo serve this community. At sites such as Bizrate (www.bizrate.com), the Egg Free Zone (www.eggfreezone.com) or Alexa (www.alexa.com), companies can share their comments on companies and their products.
  2. Position. People who are in a certain circumstance such as having a health disorder or being at a certain stage of life, such as communities set up specifically for young people or old people. Examples are teenage chat site Dobedo (www.dobedo.co.uk), Cennet (www.cennet.co.uk) ‘New horizons for the over 50s’, www.babycenter.com and www.parentcentre.com for parents and the Pet Channel (www.thepetchannel.com).
  3. Interest. This community is for people who share an interest or passion such as sport (www.football365.com), music (www.pepsi.com), leisure (www.walkingworld.com) or any other interest (www.deja.com).
  4. Profession. These are important for companies promoting B2B services. For example, Figure 9.16 shows how companies promoting marketing services can showcase their expertise or services through participating in the networks.

These B2B vertical portals can be thought of as ‘trade papers on steroids’. In fact, in many cases they have been created by publishers of trade papers, for example Emap Business Com­munications has created Construction Plus for the construction industry. Each has industry and company news and jobs as expected, but also offers online storefronts and auctions for buyers and sellers and community features such as discussion topics. Of course, the trade papers such as Emap’s Construction Weekly are responding by creating their own portals.

You will notice that most of these examples of community are intermediary sites that are independent of a particular manufacturer or retailer. A key question to ask before embark­ing on a community-building programme is: ‘ Can customer interests be best served through a company-independent community?’.

If the answer to this question is ‘yes’, then it may be best to form a community that is a brand variant, differentiated from its parent. For example, Boots the Chemist created Hand- bag.com as a community for its female customers. Another and less costly alternative is to promote your products through sponsorship or co-branding on an independent community site or portal or to get involved in the community discussions.

Alternatively companies can create their own forums although successful examples are relatively rare since there is a fear that a brand may be damaged if customers criticize prod­ucts, so some moderation is required. Honda UK (www.honda.co.uk/car) provides a good example of a community created by their brand on their site. Rather than having a separate community section, the community is integrated within the context of each car as ‘second opinions’ menu options in the context of each car. Interestingly, some negative comments are permitted to make the discussion more meaningful.

A potential problem with a company-hosted forum is that it may be unable to get sufficient people to contribute to a company-hosted community. But an example where initial recruitment of contributors and moderation has been used to grow the forum is B2B: software services com­pany SAP has successfully created several niche communities to support its business with over 1 million software engineers, partners and business people (www.sap.com/community). Contri­butions are rewarded through donations to international aid charities.

Simpler examples of community interactions are provided by ratings systems which are popular on many retail web sites and blogs which have some options for comments and discussions.

What tactics can organizations use to foster community? Despite the hype and potential, many communities fail to generate activity, and a silent community is not a community. Parker (2000) suggests eight questions organizations should ask when considering how to create a customer community:

  1. What interests, needs or passions do many of your customers have in common?
  2. What topics or concerns might your customers like to share with each other?
  3. What information is likely to appeal to your customers’ friends or colleagues?
  4. What other types of business in your area appeal to buyers of your products and services?
  5. How can you create packages or offers based on combining offers from two or more affinity partners?
  6. What price, delivery, financing or incentives can you afford to offer to friends (or colleagues) which your current customers recommend?
  7. What types of incentives or rewards can you afford to provide customers who recommend friends (or colleagues) who make a purchase?
  8. How can you best track purchases resulting from word-of-mouth recommendations from friends?

A good approach to avoiding these problems is to think about the problems you may have with your community-building efforts. Typical problems are:

  • Empty communities. A community without any people is not a community. The traffic­building techniques mentioned in an earlier section need to be used to communicate the proposition of the community.
  • Silent communities. A community may have many registered members, but community is not a community if the conversation flags. This is a tricky problem. You can encourage people to join the community, but how do you get them to participate? Here are some ideas.
    • Seed the community. Use a moderator to ask questions or have a weekly or monthly ques­tion written by the moderator or sourced from customers. Have a resident independent expert to answer questions. Visit the communities on Monster (monster.co.uk) to see these approaches in action and think about what distinguishes the quiet communities from the noisy ones.
    • Make it select. Limit it to key account customers or set it up as an extranet service that is only offered to valued customers as a value-add. Members may be more likely to get involved.
  • Critical communities. Many communities on manufacturer or retailer sites can be critical of the brand, for example an early community from the bank Egg (egg.com) was closed due to negative comments.

Finally, remember the lurkers – those who read the messages but do not actively contribute. There may be ten lurkers for every active participant. The community can also positively influence these people and build brand.

3. Techniques for managing customer activity and value

Within the online customer base of an organization, there will be customers who have differ­ent levels of activity in usage of online services or in sales. A good example is a bank – some customers may use the online account once a week, others much less frequently and some not at all. Figure 9.17 illustrates the different levels of activity. Another example is a utility (energy) provider of electricity where self-service involves use of e-billing and another is a mobile phone company where customers can check their usage and top up their usage.

To improve the adoption of ‘web self-service’ which helps reduce costs it is important to define measures which indicate activity levels and then develop tactics to increase activity levels through more frequent use. Objectives and corresponding tactics can be set for:

  • Increasing number of new users per month and annually (separate objectives will be set for existing bank customers and new bank customers) through promoting online services to drive visitors to the web site.
  • Increasing % of active users (an appropriate threshold can be used – for some other organ­izations it could be set at 7, 30 or 90 days). Using direct communications such as e-mail, personalized web site messages, direct mail and phone communications to new, dormant and inactive users increases the percentage of active users.
  • Decreasing % of dormant users (were once new or active, could be sub-categories), but have not used within a time period to be classified as active.
  • Decreasing % of inactive users (or non-activated) users. These are those who signed up for a service such as online banking and username was issued, but they have not used the service.

You can see that corresponding strategies can be developed for each of these strategies.

Another key metric, in fact the key retention metric for e-commerce sites, refers to repeat business. The importance of retention rate metrics was highlighted by Agrawal et al. (2001). The main retention metrics they mention and show the impact on profitability are:

  • Repeat-customer conversion rate – how many first-time customers purchase a second product?
  • Repeat-customer base – the proportion of the customer base who have made repeat purchases.
  • Number of transactions per repeat customer – this indicates the stage of development of the customer in the relationship (another similar measure is number of product categories purchased).
  • Revenue per transaction of repeat customer – this is a proxy for lifetime value since it gives average order value.

4. Lifetime value modelling

An appreciation of lifetime value (LTV) is also key to the theory and practice of customer relationship management. However, while the term is often used, calculation of LTV is not straightforward, so many organizations do not calculate it. Lifetime value is defined as the total net benefit that a customer or group of customers will provide a company over their total relationship with a company. Modelling is based on estimating the income and costs associated with each customer over a period of time and then calculating the net present value in current monetary terms using a discount rate value applied over the period.

There are different degrees of sophistication in calculating LTV. These are indicated in Figure 9.18. Option 1 is a practical way or approximate proxy for future LTV, but the true LTV is the future value of the customer at an individual level. Lifetime value modelling at a segment level (4) is vital within marketing since it answers the question:

How much can I afford to invest in acquiring a new customer?

Lifetime value analysis enables marketers to:

  • Plan and measure investment in customer acquisition programmes
  • Identify and compare critical target segments
  • Measure the effectiveness of alternative customer retention strategies
  • Establish the true value of a company’s customer base
  • Make decisions about products and offers
  • Make decisions about the value of introducing new e-CRM technologies.

Figure 9.19 gives an example of how LTV can be used to develop a CRM strategy for differ­ent customer groups. Four main types of customers are indicated by their current and future value as bronze, silver, gold and platinum. Distinct customer groupings (circles) are identified according to their current value (as indicated by current profitability) and future value as indicated by lifetime value calculations. Each of these groups will have a customer profile signature based on their demographics, so this can be used for customer selection. Different strategies are developed for different customer groups within the four main value groupings. Some bronze customers such as Groups A and B realistically do not have devel­opment potential and are typically unprofitable, so the aim is to reduce costs in communications and if they do not remain as customers this is acceptable. Some bronze customers such as Group C may have potential for growth, so for these the strategy is to extend their purchases. Silver customers are targeted with customer extension offers and gold customers are extended where possible although these have relatively little growth potential. Platinum customers are the best customers, so it is important to understand the communication preferences of these customers and not to over-communicate unless there is evidence that they may defect.

Source: Dave Chaffey (2010), E-Business and E-Commerce Management: Strategy, Implementation and Practice, Prentice Hall (4th Edition).

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