Online Sellers See Unexpected Trend: Loyalty
If the Internet offers the “lowest prices on Earth” just a mouse click away, as one online retailer claims, then who can make any money?
Few businesses are, but recent indications suggest that price competition online will not be as cutthroat as once thought, with many online retailers employing both technological and marketing tools to build customer loyalty, encouraging them to make decisions based on criteria other than price.
While the Internet allows for consumers to easily float from one retailer to the next, a growing amount of evidence shows that they don’t. Brand and convenience are playing the same key roles online as they do in the offline world.
“The amount of comparison shopping increases with the amount of money that I’m paying for the item,” said Christopher Lochhead, chief marketing officer of San Francisco-based Scient Corp., a business strategy firm. “People will comparison-shop more, but at the end of the day, just like in any business, it’s going to be about the overall experience above the price.”
When the two largest online music-only retailers, CDNow Inc. and N2K Inc., decided to merge earlier this year, they found a mere 10% overlap between their customer bases, which combined is 1.2 million.
“That surprised us, absolutely,” said Jon Diamond, chief executive of N2K, who will become chairman of the merged company. “The point about being a click away and shoppers looking for something 50 cents or a dollar cheaper just doesn’t seem to be the case. There really is a loyalty between the customer and the brand.”
A survey released last week found retailing pioneer Amazon.com Inc. the favorite among online book buyers, even though it ranked only 10th when it came to price, according to Gomez Advisors, the Concord, Mass., research firm that conducted the survey.
Many online retailers hold the notion that it will never be cheaper to attract customers than right now and that once acquired, they are theirs to lose. Once the reputation for quality and customer service has been established, the strategy goes, prices can be raised, within limits.
Many see personalization tools as a key to keeping customers even as prices are slashed by low-cost vendors. Net Perceptions Inc.’s collaborative filtering tool, for example, recommends items based on what a customer has already purchased, matching it against a database of customers who have bought the same products. As a customer buys more from a store or network of retailers using the program, the program learns more about what the customer likes and can make more accurate recommendations, increasing the likelihood that a person would stay with that store.
Loyalty programs such as Netcentive Inc.’s ClickRewards offer repeat customers airline frequent flier miles and other incentives, with the technology allowing companies to make offers targeted to a customer’s interests.
“Stores get to know you better just as you get to know the stores better, and over time you get to create the store that is your store, exactly right for you,” said David Risher, senior vice president for product development at Amazon. “The dollar price of an item is relatively small compared to the overall price, which includes the time that you’ll take listening to the CD or reading the book, so it’s worth it to find the right one.”
But as tools such as Internet shopping agents, which allow a shopper to quickly scan a broad range of stores for a specific product, become more powerful, prevalent and easy to use, consumers may become more price-conscious.
“To date, purchasing online has been about convenience,” said Kate Delhagen, a retail analyst with Forrester Research. “It’s going to be very different a year from now when these shopping agents start churning out better deals.”
Aliso Viejo-based Buy.Com Inc., an Internet superstore using the slogan “The lowest prices on Earth,” has a business model that relies not on profits from product sales but from advertising to shoppers on their site. The company partners with distributors that ship the product, while Buy.Com manages the Web store.
The price pressures online combined with the cost of maintaining and promoting an effective Web site will soon lead to a shakeout among online retailers, possibly early next year, many industry players say.
“There’s a growing realization that there’s not enough traffic to go around,” said Mike Bernstein, an analyst with Connecticut research firm GartnerGroup. “A lot of them have burned through a lot of cash just to get their name out.”
Brent Rusick, Buy.Com vice president of sales and operations, believes there will be only “two or three key online retailers. Because there are no geographic boundaries, there won’t be hundreds of retailers like there are in the real-world environment.”
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Times staff writer Jonathan Gaw can be reached via e-mail at jonathan.gaw@latimes.com.
