The Internet represents a fundamentally different environment for businesses. It has a paradoxical impact on building and maintaining customer relationships: On one hand, it gives firms a global presence and allows them to quickly acquire customers in a cost-effective fashion; on the other hand, it opens up the industry to increased competition and, as a result, reduces the likelihood of businesses retaining customers in the long run.
Three interrelated forces undermine customer retention in the e-commerce environment:
Reduction in consumers’ search costs. Certain Web technologies, such as search engines and intelligent agents, directly reduce the customers’ search costs by providing relevant information for consumer decision making at a much lower cost and time. To purchase a book, for example, a customer can use a Web site called isbn.nu to quickly search, compare pricing information, and purchase from the cheapest online bookstores.
Lower barriers to entry. The Internet has lowered barriers to entry and opened doors to new entrants in many industries. Since the Web is based on an open technology, Web sites can be easily mimicked, replicated, or even copied. A small company can now own an online real estate business that offers its users the same caliber of features, functionalities, and design as a site owned by a Fortune 500 company. A new competitor can enter the arena by learning from existing players and then using state-of-the-art technology to leapfrog over them.
Reduced distinctiveness of firms. As a result of the first two forces, the Web significantly undermines the distinctiveness of a company. Imagine a new business wanting to invest in its Web site. This site must compete with thousands of other Web sites selling similar services. Little differentiation can be done because they can be quickly imitated.
Retention of customers has become increasingly important for businesses operating on the Web because their customers are now playing a dual role of end users and consumers. Effective retention of online end users will let the Web site grow in size and popularity. Online users like to join large communities and visit the most viable sites such as Amazon.com and eBay. They presume those sites are more reliable, are able to provide more benefits due to economies of scale, and offer more customized services due to better techniques of collecting preferences [3]. They are concerned about being stranded with a loser and having to pay switching costs [2].
Effective retention of consumers leads to monetary benefits for businesses. First, customers who remain with a firm because they are pleased with the service are more likely than short-term customers to purchase additional services and to spread positive word-of-mouth experiences to others. Second, firms can spend resources more efficiently in serving these customers due to experience curve effects and the absorption of acquisition and establishment costs [7]. Third, long-term customers value the relationship to the extent they are willing to pay a higher price for the same kind of service. For example, it was found that profit on credit card services purchased by a customer with a 10-year history is on average three times greater than that of a five-year customer [9].
Online User Retention Study
In order to identify effective customer retention strategies, our team worked with one of the largest financial institution in the U.S. to study some aspects of the behavior and intention of their online banking customers.1 The bank has a nationwide branch network and a retail customer database. Its Internet banking service was introduced in the early 1990s. Random samples were drawn from the customer database and survey questionnaires were mailed to two groups of online banking users—current and past customers.
From qualitative and quantitative analysis of the survey data, our team identified several interesting findings that online businesses can adopt for their retention initiatives. These findings should serve as general guidelines for IS practitioners who establish an e-commerce presence to acquire and maintain customers. Since the survey was conducted within a specific domain of online banking, the audience is cautioned with generalizing these findings across all e-commerce industries.
Categorization of user sophistication level. For businesses with a large online customer base, perhaps the most important finding of this study—discovered almost entirely by accident—is that any online retention efforts should start with the categorization of users by their technological sophistication. This finding is important because it will help businesses focus their retention initiatives on the correct group of customers and perhaps do so in a much more cost-effective manner.
We classified the samples into two distinct groups—sophisticated and novice users. Sophisticated users are customers who have a higher understanding of computer and Internet technology and require more sophisticated financial services. Sophisticated users tend to use the online banking system to accomplish more complicated tasks, such as bill payment and managing their personal finances through third-party software (for example, Quicken, or MS Money). It was also found that, despite their concerns about the system, most of the sophisticated users continue utilizing the online banking system. Novice users are those who are not experienced with computers and the Internet; they tend to use the online banking system for simple tasks such as account access.
We found that each group has different concerns and, most importantly, different causes of service termination. Separating the two groups allows us to pinpoint the causes and, eventually, address the different needs to prevent them from leaving the online bank. Figure 1 lists the most frequently cited causes of service termination reported by sophisticated and novice users in this study.
It was found that novice users cease online banking because of simple technological problems, such as browser compatibility or forgetting passwords. These problems, though simple to solve, reportedly hindered their attempts to access the system and eventually led to termination. If these users were given the needed information or assistance, they would be likely to continue using the system.
On the other hand, sophisticated users tend to terminate the service because the online banking experience did not meet their expectations in terms of features, performance, quality, and cost. They reported various termination causes, ranging from server speed, to the ability to download transactions into their personal software. To retain these customers, businesses must meet their expectations by responding to those attributes.
These findings are in line with previous IS research advocating computer self-efficacy as an important predictor of IT usage. These findings also amplify the fact that any customer retention initiative must be accompanied by an analysis of return on investment. From the study, we found most novice users are past customers. While retention efforts must be directed toward this group of users, they represent a much smaller percentage of overall profitable activities in the online banking system. Though there is a possibility that novice users’ limited understanding of technology has caused service termination before they generate profit for the online banking, the general consensus is that retaining novice users will lead to lower return on investment than retaining sophisticated users. Therefore, any investment to retain novice users must be cautiously analyzed and financially justified. Recommended measures are those that can be implemented with less cost. Such measures include online demo, FAQs, and automatic lookup of username and password.
Ensuring perceived security. We found that users are unlikely to trust a commercial Web site if they perceive their online experience is not sufficiently secured. Without trust, the relationship between online buyers and sellers on the Internet will neither take place nor continue [1]. Therefore, to retain online customers, we must know how to create perceived security and what constitutes it in an e-commerce environment.
Perceived security consists of two components—perception of security in using the Web to transmit sensitive information, and perception of security in interacting with the firm (or the provider of services) [8, 10]. Therefore, to ensure perception of security, e-commerce firms must convince users the Web is a secure place to engage in a relationship exchange, and prove that interacting with the firm is safe and secure.
The former can be done by implementing and informing users about security features available on the Web, for example, digital certificates, secure servers, or third-party trusting agencies. As for the latter, users tend to think of this issue in a broad sense that involves protections against crimes, invasions of privacy, and errors. Firms must communicate the fact they had implemented technologies and procedures that prevent computer crimes; they always adhere to privacy principles; and their system is reliable because they always allocate sufficient resources to effectively correct any occurrence of errors. Over time, as neither crimes nor invasions of privacy take place in consumers’ lives online, their concerns will tend to be largely about protecting themselves against errors and having the means to fix any errors that occur [8].
Empower your users. In our study, we found users who feel empowered are likely to be committed to the relationship (see Figure 2). Committed users are unlikely to terminate the online services or switch to another service provider. This notion is supported by Garbarino and Johnson [4], who found a positive correlation between relationship commitment and a consumer’s future intention to remain with a company (a construct closely related to customer retention).
Customers can be empowered when given the freedom and ability to decide the best way to solve their problems, and sufficient control over their problem-solving process. Empowerment is achieved when the users are given freedom, ability, and control to the level they can combine knowledge supplied by the company and their own local knowledge and creativity to arrive at the most satisfying solution [5].
In e-commerce settings, online firms can empower their customers by providing them with Web applications that:
- Shift the role of business as the provider of products or services to that of facilitator of the customers’ problem-solving process;
- Provide users with critical resources to solve their problems, including necessary information, structure (or instructions), and needed features that can be tailored to individual problems; and
- Are flexibility and ease of use (or control).
Online trading companies such as E*Trade and eSchwab are good examples of customer empowerment. They provide users with ample research, while their flexible software features allow users to trade directly, via the Internet, without the help of a broker.
Create trust and commitment. Contrary to popular beliefs, obvious factors such as relationship benefits or product attributes were not found to affect retention directly or indirectly. Though further validation is needed, the fact the research setting was in an e-commerce environment may be part of the reason for the insignificant effects of benefit and product attributes. In e-commerce settings, businesses reside in a highly competitive environment, with little differentiation among products in the same segments. When firms compete on the basis of monetary return or product attributes, other firms can quickly imitate. By investing in factors such as commitment and trust, firms can create barriers to switching and can build long-term relationships with customers in ways that cannot easily be duplicated by competitors.
In our study, commitment was found to be a function of perceived empowerment, termination cost, and trust. Trust was found to be a function of shared value, perceived security, and communication.
Interestingly, our findings reveal a stronger effect from trust to retention than from commitment to retention. Prior research has consistently shown that commitment usually has a stronger effect on customer retention, suggesting that, in the e-commerce context, users remain committed to a system primarily because they think it is still trustworthy. With an absence of trust, a few customers may be willing to remain using the system given they are already committed. Nonetheless, users who experience a feeling of distrust are more likely to stop using the service regardless of their prior commitment.
The domination of trust over commitment, however, is in line with past IS literature, which advocates trust as the single most important factor in successful e-commerce [1, 6]. In the absence of face-to-face contact, users must have a high level of trust before they will give up personal and financial information. Since the use of e-commerce applications on the Internet usually involves both personal and financial information, the feeling of trust must exist before users want to use the system.
Beware of the spillover effects. Like it or not, most online companies must still interact with customers outside the Web realm. For click-and-mortar businesses, such as traditional discount stores or banks, services at the branch will have an impact on online customers. Even a pure e-commerce player such as Amazon.com must still deliver products through offline channels. Therefore, offline factors also impact whether the online customers will decide to leave or stay.
From our analysis, at least two offline factors—reputation and quality—have a spillover effect on online customer retention. First, users who believe the bank has a good reputation will be likely to remain using the online service. The bank’s reputation was established in terms of it being a financial institution, not an online business or a Web site. Secondly, users who perceive the bank offers great service at the branch office will be more likely to remain using the online bank. In these two situations, we found that users will remain using the online banking interface even though they had physically moved outside the bank’s existing branch network. Therefore, it seems reasonable to conclude the opposite is also true. When users perceive the bank has a poor reputation or poor services, they will be more likely to stop using the online services.
This finding shows that business policies beyond the control of the e-business division can cause the termination of online users. The implication is the e-business division must be well prepared to take a hit if there is a change of corporate policies. Despite the spillover effect, there is strong evidence in our study indicating that online factors are still more critical to online customers than offline factors.
Conclusion
The proliferation of the Internet has significantly threatened the ability of businesses to retain their customers. Since customer retention affects growth and profitability, effective retention strategies in e-commerce settings are imperative for businesses.
What specific actions can managers take to maximize the chance of online customers remaining with the company? This research study implies that customer retention initiatives should start with segmenting current online customers along their level of sophistication and addressing each segment with their different needs.
For novice users, retention initiatives should focus on measures that help them overcome technical barriers and become sophisticated users. Examples of specific measures include providing clear and complete online help and demos, providing automatic look-up of username and password (most frequently cited problem in our study), offering incentives to adopt more advanced features, and building a community of users where participants can exchange ideas and consult one another.
For sophisticated users, retention initiatives should focus on measures that create commitment and trust in the relationship. From our study, commitment and trust can be developed by empowering customers, increasing termination costs, ensuring the sharing of values, implementing effective and proactive communications, and ensuring perceived security.
Finally, cost/benefit analyses should be conducted to ensure the retention initiatives yield a desirable return on investment. This is important considering that not all customers are profitable, and many e-commerce companies once expanded their businesses aggressively by acquiring new customers without gaining a profit.
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