Wharton marketing professor
Wharton marketing professorDavid Reibstein recently asked a Land’s End executive visiting campus how the apparel company had become such a well-known brand.
The executive responded that "Land’s End doesn’t consider someone a customer until he or she has made at least two purchases," said Reibstein during a presentation to Wharton alumni May 19 entitled, "Keeping Your E-Customers Coming Back." "It shows the real importance of retaining customers, not just acquiring them."
Whether it is an "old economy" business like Land’s End or the burgeoning "new economy," keeping customers is the key to a company’s longevity, said Reibstein. The perception that the Internet is a world of perfect information and that in a world of perfect information, people will be able to find the price they want for everything is somewhat misleading, he added. "People seem to believe that because of the Internet, prices will be driven down and margins will be driven down. But this is not entirely true."
Reibstein brought up the case of the artist Peter Max. Max, whose representations of bright-hued objects on posters and paintings have been popular for more than 30 years, has contracts with galleries around the world. "He’s a great artist and a really good businessman," said Reibstein. But one day, a friend of Max’s called to tell him to look on the eBay auction website to see how much his works were selling for there. To Max’s surprise, said Reibstein, they were selling for an average of $5,500, more than twice what he was getting in galleries.
"What we actually believe is that, with the Internet, the works are now accessible to more and more people, many of whom will want them," Reibstein said. "So counter to what many people think, prices are actually driven up by going on the ‘net."
Reibstein said that it takes an average of $250 for a Web-based company to acquire a customer. But it should take far less to retain that customer and given that prices for items may actually increase on the Internet, it is essential for a company to find out what will keep the customer in line for its on-line business.
To that end, more than 3,800 retailers have signed on with Bizrate.com, a company Reibstein co-founded with Farhad Mohit and Henri Asseily. When consumers purchase something on line from one of the member companies, an ad from Bizrate.com appears asking these consumers to fill out a survey detailing their experience of buying through the Internet.
Based on responses to those surveys, Reibstein offered a few thoughts about how to keep customers coming back. First, it is important to know that only 38% of purchasers who buy on-line in a category actually come back to a site to buy a similar product again. "That’s pretty amazing, since you would normally think that people would come back readily," said Reibstein. "I suspect people are still jumping around on the Internet. It’s a tough place to retain customers."
In the Bizrate.com surveys, Reibstein said, people claim that price is the main determining factor in their initial on-line purchases. However, when it comes to repeat business, price is way down the line and customer support is by far the number one factor when purchasers return to an on-line retailer. "If you rated high in customer support, you had a good chance of getting a customer back," he said. "But if you rated low, you’re dead. You’re never going to see that customer again."
So while on the surface, it may seem that price is very important, it is not the only thing that will get a customer back. "When you live by the sword, you die by the sword," said Reibstein. "Someone can always sell an item for less money."
Reibstein said he’d heard of an on-line bookseller that offered a guarantee to sell books for 5% less than the price listed on amazon.com. But amazon.com is still selling millions of books. Customers, then, obviously find amazon.com provides other things that they value.
What you can do to get your customer to come back will be critical to your business’s success. Reibstein quoted from an A.C. Nielsen study which said that the number one determinant of a product’s success was in its repurchase rate. But he also showed statistics from another survey by Red Herring magazine that showed that 55% of all electronic commerce retailers do not distinguish between new customers and repeat customers. He said that too many new Internet businesses are so obsessed with getting customers that they don’t see the long-range picture that they need these customers back in order to ultimately succeed.
"The 1998-99 ‘net retailing lesson was to buy and acquire customers. The April 2000 lesson," he said, alluding to the recent crash of some Internet stocks, "may be to look at what people spend in the long run and figure out how to keep them around."
Reibstein has found that a mere 10% increase in repeat customers can lead to a 9% increase in profits, the price of acquiring customers being so much greater than retaining them.
As the Bizrate.com surveys show, the answer is not just price, but how you treat the customer, especially the first time around. Overwhelmingly, Reibstein said, people want to know they are getting the product they thought they were getting in the time period they expect to get it, followed by customer support to explain whatever they need to know. "It’s an old lesson in a new economy. It’s easy for us to lose a customer if we don’t do it right the first time around. More and more, with the information available on the Internet, you may not get a second chance."