Data Analysis, Service Are Keys to Retention

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Two to three years ago, online adoption was growing rapidly, e-businesses could rely on a constant flux of new users to justify their revenue models, and Internet entrepreneurs preached the importance of customer acquisition and popularized phrases such as "first-mover advantage."

The key to a successful online business model, it seemed, was to dominate the respective market space first and worry later about how best to serve the customers.

Today, the Nasdaq has dropped more than 50 percent since its high last spring. Hundreds of dot-coms have failed, and other new-economy stalwarts such as Amazon and Yahoo have seen their market caps plummet. Growth of Internet adoption has slowed, making it harder to acquire new customers. Companies initially able to dominate their market spaces are realizing they cannot sustain their advantages without a better understanding of who their customers are and what they want. The lower cost of retaining an existing customer vs. acquiring a new one, coupled with slower online adoption growth, has made customer retention and loyalty more important than ever.

Customer loyalty programs that reward frequent shoppers with free products or services, discounts, cash and other incentives can be popular retention tools.

In the online space, adults participating in frequent-shopper programs are among the most valuable consumers. They are well-educated, wealthy, tech-savvy consumers who spend more money online than adults not using such programs do. They have average annual incomes of $80,000 and spend more than $1,500 online each year (the average online purchaser spends about $1,000). When properly applied, such a program can take an already lucrative consumer segment and further increase its value and spending.

The problem is knowing when and how to apply frequent-shopper programs. Though users of these online programs are valuable, they also are fickle. They have a propensity to switch brands or cancel purchases, and they demand first-rate customer service. More than 80 percent indicated that customer service features were important in determining whether they would return to an online shopping site.

Frequent-shopper programs are important in driving high-value customers to buy at a particular Web site, but customer service is needed to retain them. And while online features such as a frequently-asked-questions page or an e-mail reply service have gained popularity, the most popular and crucial customer service offering across all online segments is a toll-free number to a live person. If a frequent-shopper program is not supported by a customer service package that includes offline telephone support, it will be just another wasted promotion.

A final consideration is that frequent-shopper and other loyalty programs are not just about getting customers to spend more money, at least in the short term. They are a means of gathering consumer information. A well-run loyalty program will track purchases, log customer service requests and gather demographic information.

Once enough data is collected, retailers can develop profiles, enabling them to manage relationships at individual levels. The profiles can be used to create models that predict how to upsell and cross-sell based on customers preferences and characteristics.

Frequent-shopper and other customer loyalty programs are invaluable in retaining and growing market share, and an adult signing up for an online frequent- shopper program likely is a wealthy and big-spending customer. But if a retailer fails to support its loyalty program with multichannel customer service offerings and does not establish an effective system for warehousing and using consumer data, it is failing to make use of the customer retention and revenue expansion potential that loyalty programs offer.

• Ben Cutler and Alexandra Goodrich are analysts at Cyber Dialogue, New York. Reach Cutler at and Goodrich at All figures referenced in this article are from Cyber Dialogue.

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