T h e Va l u eof Online
Customer
Loyalty
And how you
can capture it

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The power of online customer loyalty

Why does customer loyalty have such a large
impact on a site's economics? Consider the

In the first years of e-commerce, it was generally

following facts, which were collected throughaccepted that customer loyalty and online shopping

two surveys of web shoppers conducted bywere mutually exclusive. The Web seemed to makeBain & Company and Mainspring1:

customer loyalty irrelevant; at the click of a mouse,•

shoppers could effortlessly cover the globe in search

You won't break even on one-time shoppers.

of the lowest price, with little to hold them at one

Because customer acquisition costs insite. Yet, while it’s true that online shoppers can skip

e-commerce are high, to recoup youreasily from one site to the next, a highly loyal

investment you need to convince customers

segment of online shoppers has emerged nonetheless,to return to your site time and again. For

and tools such as Internet bookmarks have led to usage

example, the average online apparel shopper

patterns that are loyal, almost addictive. Today, loyal

in this study wasn't profitable for the retailer

shoppers visit their favorite sites far more frequently

until he or she had shopped at the site fourthan they would any bricks-and-mortar store.

times. This implies that the retailer had toThis surprising degree of customer loyalty can haveretain the customer for 12 months just to

an enormous impact on web-site profitability. We

break even! (Figure 1) And online grocers,

simulated the long-term economics of web sites

who spent upwards of $80 to acquire a

in various industries, and customer loyalty proved tocustomer, had to retain that customer for

be a crucial factor in profitability, even more so than

18 months to break even. In fact, except

for offline companies. Small changes in loyalty alone,

for high-ticket items, in almost no instanceespecially among the most profitable customers, cancan an online retailer break even on a one-

account for the long-term divergence of initiallytime shopper.

comparable online companies, with some rising
to exceptional returns and others sinking tolasting unprofitability.
Figure 1: Customer lifetime value
Apparel60
50Profit per
Customerper Six-Month
PeriodReferrals

40
30
20

Spending growth

10
0
-10

Acquisition costBase Spending

-20
-30
-40

Break even
Point

-50
-60

0

6

12

18

24

30

36

Months Since First Purchase
Source: Bain & Company/ Mainspring Online Retailing Survey (n=2116), December 1999

1Two surveys of web shoppers were conducted. The first, conducted by Bain, surveyed 522 web shoppers at ten popular Internet retailers. The second, a joint effort by Bainand Mainspring, surveyed 2,116 online shoppers in three e-tailer categories: groceries, consumer electronics and appliances.

B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t1•

Repeat purchasers spend more and generatelarger transactions.

•

In our study, the longer

Repeat customers refer more people and bringin more business.

Word of mouth is the single

their relationship with an online retailer, themost effective and economical way online

more customers spent in a given period of time.

retailers grow their sites. And loyalty, it turns

In apparel, the average repeat customer spentout, can be a key lever for referrals. On

67 percent more in months 31-36 of his or

average, an apparel shopper referred three

her shopping relationship than in months zero-

people each to an online retailer's site after

to-six. (Figure 2) And in groceries, customers

their first purchase there. After ten purchases,

spent 23 percent more in months 31-36 thanthat same shopper had referred seven people

in months zero-to-six. Higher spending

to the site. (Figure 3) For consumer electronics

levels were due in part to more frequent

and appliances, initial referrals were just over

shopping and in part to larger transactions.

four, while total referrals after ten purchases

For instance, in apparel, a shopper's fifth

were 13. The dollar impact of these referrals

purchase was 40 percent larger than the first,

can be significant: over three years, customers

and the tenth purchase was nearly 80

referred by online grocery shoppers spent anpercent larger than the first. This aids retailer

additional 75 percent of what the original

profitability, because in e-commerce, where

shopper spent. For both electronics andtransaction costs are largely fixed, larger

apparel, this number was over 50 percent.

transactions equal more profitable transactions.

Figure 2: Spending growth impact
Apparel
400
$357
$332
$282

300
$234
Amount Spentby the Average
Customer at a Retailer

200

$178

100

0
6 months

12 months

18 months

24 months

30 months

Purchasing History with Retailer
Source: Bain & Company/ Mainspring Online Retailing Survey (n=2116), December 1999

B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t2Figure 3: Referral impact
Apparel
8
7.1
5.4

6
Average Number ofPeople Referred to
Retailer SinceFirst Purchase

4
3.1
2

0
First purchase

4 or 5 purchases

10 or more purchases

Source: Bain & Company/ Mainspring Online Retailing Survey (n=2116), December 1999•

Loyal customers will buy other products from you.

All these facts add up to a simple sum: customer

Across the board, web shoppers expressedloyalty on the Internet is a key driver of long-

willingness to buy different types of products

term profitability. Loyal online customers, just likefrom their online retailers of choice. For

offline ones, spend more, refer more people, and are

example, almost 70 percent of Gap Online

more willing to expand their purchasing into new

customers said they would consider buying

categories. As a result, they are more profitable thanfurniture from the Gap. And 63 percent of

one-time shoppers. Online retailers who succeed

online grocery shoppers would buy toiletries

in building customer loyalty will ultimately be

and OTC drugs from their online grocers.

more profitable than online competitors who focus

Repeat purchasing not only builds trust

only on transactional metrics such as number of(so a customer will more likely consider

visitors, number of shoppers, eyeballs, and so forth.

purchasing other products), it also provides

So what drives e-loyalty, and how can you improve it?

more cross-selling opportunities.

Customer loyalty on the Internet is a key driver of long-term profitability. Loyal online
customers, just like offline ones, spend more, refer more people, and are more willingto expand their purchasing into new categories.

B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t

3

Figure 4: Repeat purchase drivers

Groceries

Consumer Electronics / Appliances

Apparel• Fees are reasonable• Offers lower prices than competitors• Delivers in the correct time/ place• Purchase is simple to execute• Real-time in-stock information• Money-back guarantee• Easy access to customer service• Sells the brands/products I am interested in• Can find the products easily on the site

• Order delivered correctly• Online customer service• Offers lower prices than competitors

Source: Bain & Company/ Mainspring Online Retailing Survey (n=2116), December 1999

Key factors in building online customer loyalty

When asked, online shoppers said they returned
to web sites that met their needs in four areas—
order fulfillment, price, customer service, andweb-site functionality. The impact these factors
had on retaining customers is shown in Figure 4.2

Why are fulfillment and dependability suchimportant issues? Because satisfaction in theseareas is not a given on the Internet. A surprisingnumber of customers told us that they did notreceive exactly what they thought they hadordered, they were not made aware of the total
price when they placed their orders, product

Order fulfillment and dependability

delivery was late or poor, and return policy andIn both apparel and groceries, our analysis shows that

service commitments were not met. Companies

improvements in order fulfillment and dependability

in the physical world expend enormous resources

can have a large impact on customer loyalty.

developing world-class capabilities in these areas.

Improving customer satisfaction scores on order

Why should it be easier, or less costly, on the Internet?

fulfillment by 0.5 (on a scale of one to five) can

The Internet's clear benchmark in this area isincrease implied customer retention rates by over two

Amazon.com, whose customers show the highest levels

percent, a significant amount given the survey'sof satisfaction on order fulfillment and dependability.

average implied retention rate for all web sites of 86
percent.3 For grocers, this translates to a 13 percent
rise in long-term net present value.

2In the joint Bain/Mainspring survey, we guaged the importance of various web site performance dimensions in drawing customers back to the web site; measured customers’satisfaction with specific web sites along these dimensions; and asked customers how likely they were to return to those web sites in the future. Using this information in a
multivariate regression, we calculated the potential impact of each dimension on customer retention.
3The implied retention rate was calculated for each web site based on the likelihood of its customers’ returning to that site. “Definitely will return” implied a 100 percent
retention for that customer; “probably will” = 70 percent; “might or might not” = 50 percent; “probably or definitely not” = 10 percent. These results were then aggregatedfor all the customers of each web site to yield an implied retention rate by site.

B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t

4

Providing a fair price

Customer service doesn't necessarily mean complex

Price is a key factor in both choosing a retailer andgenerating repeat sales. But, as we discovered, "price"means different things in different industries. In
consumer electronics and appliances, "offers lower

service features such as click-to-call or expensive
integration of customer information. What it doesmean is answering questions and solving problems
quickly, whether person-to-person or via self-service.

prices than competitors" was the most important

Crutchfield, for example, is a bricks-and-mortar

reason for choosing and returning to an online

retailer of electronics that has recently establishedretailer. In apparel, however, beating competitors on

an online presence. It does an excellent job ofprice wasn't even in the top five criteria in terms ofproviding customers the information they need toinfluencing choice, and placed only fourth inmake an informed purchase, giving them not only

influencing repeat sales. In addition, although

fundamental information about products online

over 95 percent of customers we surveyed say(i.e., "A radar detector is…"), but also a fully-

they comparison shop, most are actuallystaffed, 24-hour toll-free customer service number.

comparing offline and online prices.

They even provide links to the manufacturers ofSo, what's the message for the online retailer?

the products they sell.

Simply put, for most industries it's important to

As a result, Crutchfield's customer service satisfaction

provide customers a fair—but not necessarily therating is well above average versus the other sites welowest—price. You do need to meet or beat thetested (4.25 out of five for Crutchfield versus 3.70

offline price, but just as in the bricks-and-mortar

on average). And while customer retention cannot

world, you needn't have the absolute lowest price

be solely attributed to high scores on customer

as long as you provide a good deal, and in fact

service, Crutchfield's web site does enjoy an implied

you can make up for higher prices by providing

customer retention rate of 92 percent, six percent

exceptional customer service, reliability, andabove the survey average of 86 percent.

selection. Once again, Amazon.com proves thispoint. Although their books were on average$1.60 more expensive than those of the former
Books.com (now bought and folded into
BarnesandNoble.com), few Amazon.com customers
were lured away from what they knew to be a reliable
and timely service by promises of lower prices.

So, what's the message for the online
retailer? Simply put, for most industries
it's important to provide customers a fair

Customer service—but not necessarily the lowest—price.

Our research shows that improvements in customer
service can have a significant impact on customer
loyalty. In groceries, a one point improvement incustomer service satisfaction (on a scale of one tofive) yielded a five percent increase in implied
retention rates. And in consumer electronics,
the same improvement yielded over a two percent
increase in retention rates.
B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t

5Web-site functionality

Monday morning, 8:00 A.M.: What can you do?

Thirty percent of customers leave sites because

Clearly customer retention can have a big impact

they can't find what they are looking for, and evenon the profitability of online retailers. So how dofor those who do start a shopping basket, theyou actually improve customer retention? Areas ofabandonment rate is 66 percent!4 In other words,

leverage will differ for each company, but there are

the majority of people who would like to buy

some steps that all online retailers can take:online are prevented from doing so because they•either can't find the product they want, or they

Treat customers as assets, not transactions.

The conventional battleground for online

find the transaction process too complex.

retailers has been drawn around transactions

Easily located products, a simple order process,and scale, and most e-commerce metrics like-and access to real-time inventory information are

hits, click-throughs, visitors, and so on-reflect,

what draw customers back to a web site. And

this mentality. But improving customer loyalty

functionality improvements in these areas canrequires a fundamental shift in mind-set.

yield significant gains in customer retention. In

Customers are not transactions, they are

groceries, raising site functionality satisfaction

people, and capturing their long-term businessscores5 by 0.5 yielded nearly a three percent

requires earning their trust and consistently

increase in implied customer retention rates.

providing them real value and convenience.

Once again, physical retailers invest heavily in•

Measure customer retention and customer

simplifying the transaction process. Consider thesatisfaction along key retention drivers.

amounts spent on merchandising and product

It's hard to improve something you don't

placement in a bricks-and-mortar retailer, or themeasure. Start by understanding which oflarge number of check-out counters, all equippedyour customers are repeat versus one-timewith UPC scanners, at a grocery store. Shoppers

shoppers. Then, through customer research,

expect, rightly, that online retailers will do theiridentify the factors, such as customer service

part to fully leverage the Internet's enormousand order fulfillment, that are important topotential to make shopping more convenient

your customers, and measure satisfaction along

and to make their lives simpler.

these dimensions. What do you do well?
What do you do poorly? Why are your loyal
customers loyal? How can you leverage yourbest attributes to turn every shopper into a

The majority of people who would like toloyal shopper and to attract more loyal customers?

buy online are prevented from doing so
because they either can't find the productthey want, or they find the transaction
process too complex.

4Forrester Research
5Respondents were asked to rate the site from 1 to 5 based on the statement “The purchase was simple to execute.”

B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t

6

•

•

Talk to your "defectors." One of the best ways

The value of best-in-class fulfillment andto improve retention is to talk to people who

web-site functionality can also not be

have used your site and then taken their businessoverstated, as many companies found out

elsewhere. Through targeted e-mails you canduring the 1999 Christmas season. The

gain insight into why people are leaving andcompany that over-invests in marketing or

where they are going, be it online or offline.

advertising at the expense of fulfillment
and basic site functionality may succeed in

Keep tabs on competitors and other industry leaders.

drawing customers to its site, only to lose

Visit your competitors' web sites. Now visit

them forever.

your own. What are they doing that you arenot? On which dimensions are you better or••

Make the customer's life easier.

Slick web-siteworse? You may also want to visit best-in-classdesign and graphical interfaces with animation

web retailers in other product categories to

do not create loyalty; eliminating complexity

see what they are doing around key drivers

from the customer's life does. Online shoppersof retention.

want their lives to be made simpler, with theInvest in key areas, especially where you are weak.

As the research shows, improvements incustomer service, order fulfillment, price,
and web-site functionality can have alarge impact on customer retention rates.
Hometownstores.com, for instance, added achat support function to greet customers as
they enter the site, providing a more timely
resource than customer service e-mails.

offline world as their benchmark. This isdifferent from just providing a site that is easy
to use or visually entertaining. For example,
the best online retailers allow customers torequest notification when an out-of-stock
item becomes available. And reminder e-mails,
based on customer requests about upcoming
events or new information, can also save thecustomer time and effort.

Within four weeks, sales grew 30 percent

Most online shoppers' expectations are fairly

while e-mail volume fell from thousands

modest: they want a good service that's secure,

to just dozens.

easy to use, and simplifies life; a fair price; reliable

Other customer service improvementsthat can impact retention include Frequently
Asked Questions (FAQs) sections with wellorganized information, knowledge bases or
wizards for process completion, and quickresponse e-mails. Because these are automatedservices, they cost less than traditional offline
customer service tools (such as toll-free

and timely fulfillment; and resources available toanswer questions quickly and accurately. Meetthese seemingly simple requirements, and you will
earn the customer's loyalty. The few companies thatsucceed at this have a real advantage over theircompetitors: they have loyal, satisfied customers
and a business model that, in the long run, yields
superior returns.

telephone numbers), and are more scalable
as the site grows.

B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t

7Bain & Company:

Mainspring

Strategy for sustainable results

eStrategy Consulting

Bain is one of the world's leading global business

Mainspring is the leading eStrategy consulting

consulting firms. Its 2,500 professionals serve major

firm that focuses exclusively on developing

multinationals and other organizations through anactionable Internet strategies. It enables Fortune

integrated network of 26 offices in 18 countries. Its

1000 companies to protect, evolve, and transform

fact-based, "outside-in" approach is unique, and its

their business for sustained competitive advantage

immense experience base, developed over 27 years,

by offering an integrated process of business,covers a complete range of critical business issues incustomer, and technology strategy planning. Its

every economic sector. Bain's entire approach isproprietary process hinges on the following

based on two guiding principles:

activities to help guide clients effectively through1) working in true collaboration with clients to

eStrategy development:

craft and implement customized strategies that

• Building the Business Model

yield significant, measurable, and sustainable• Creating the Customer Experience

results, and• Defining the Solution Architecture2) developing processes that strengthen a client's• Commercializing the Business Plan

organization and create lasting competitive

Working with Mainspring, companies identify,advantage. The firm gauges its success solely

define, and formulate a portfolio of strategic

by its clients' achievements.

Internet initiatives that are customized for their

Bain & Company's global e-commerce practicehelps businesses achieve outstanding results in thebusiness and designed to create sustainable
competitive advantage.

new economy. We work with traditional companies

Mainspring’s core services include eStrategy

to launch and manage online operations, and with

Consulting, eStrategy Direct, and the eStrategy

pre-IPO clients to hone business models and accelerate

Executive Council. These services are provided

to market. We also work with entrepreneurs toto companies in the financial services; retail andincubate new ideas into viable businesses, in someconsumer goods; technology, communications, andcases taking equity stakes through our bainlab

media; and manufacturing industries. Mainspring

subsidiary. Our e-commerce practice professionals

was founded in 1996 and has offices in Cambridge,

work around the globe in every major industry.

Massachusetts and New York City.

8 B a i n & C o m p a n y, I n c .

T h e Va l u e C u s t o m e r L o y a l t y A n d h o w y o u c a n c a p t u re i t

8By Sarabjit Singh Baveja,
Sharad Rastogi, and Chris
Z o o k of Bain & Company;
Randall S. Hancock andJulian Chu of Mainspring

BAIN & COMPANY, INC.

MAINSPRING

Two Copley PlaceOne Main Street

Boston, Massachusetts 02116

Cambridge, Massachusetts 02142

Tel:

Tel:

(617) 572 2000

(617) 588 2300

Fax: (617) 572 2427

Fax: (617) 588 2305

www.bain.com

www.mainspring.com

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