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WINNING THE ONLINE CONSUMER 2.0

2001FEBRUARY

Converting Traffic into Profitable Relationships

www.bcg.com EC-R21-2/01

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The Boston Consulting Group is a general managementconsulting firm that is a global leader in business strategy.BCG has helped companies in every major industry andmarket achieve a competitive advantage by developing andimplementing unique strategies. Founded in 1963, the firm now operates 48 offices in 32 countries. For furtherinformation, please visit our Web site at www.bcg.com.

The Boston Consulting Group has published a series of

reports on e-commerce. It includes the following:

Vital Signs: The Impact of E-Health on Patients and Physicians

A report on the U.S. market by The Boston Consulting Group, February 2001

Patients, Physicians, and the Internet: Myth, Reality, and Implications

A report by The Boston Consulting Group, January 2001

Mobile Commerce: Winning the On-Air Consumer

A report by The Boston Consulting Group, November 2000

The Business-to-Business Opportunity: Creating Advantage

Through E-Marketplaces

A report by The Boston Consulting Group, October 2000

Online Retailing in Latin America: Beyond the Storefront

A BCG report in partnership with Visa International, October 2000

(Available in English, Spanish, and Portuguese)

Organizing for E-Commerce

A discussion paper by The Boston Consulting Group, April 2000

The State of Online Retailing 3.0

A Shop.org study by The Boston Consulting Group, April 2000

E-Tail of the Tiger: Retail E-Commerce in Asia-Pacific

A BCG NetBizAsia strategy report, March 2000

Winning the Online Consumer: Insights into Online Consumer Behavior

A report by The Boston Consulting Group, March 2000

The Race for Online Riches: E-Retailing in Europe

A report by The Boston Consulting Group, February 2000

For a complete list of BCG publications and information about

how to obtain copies, please visit our Web site at www.bcg.com.

WINNING THE ONLINE CONSUMER 2.0Converting Traffic into Profitable Relationships

www.bcg.com

FEBRUARY 2001

MICHAEL SILVERSTEIN

PETER STANGER

NINA ABDELMESSIH

2

© 2001 The Boston Consulting Group, Inc. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: 617-973-1339, attention IMC/PermissionsMail: IMC/Permissions

The Boston Consulting Group, Inc.Exchange PlaceBoston, MA 02109

3

ABOUT THE AUTHORS 4

INTRODUCTION 5

THE CHALLENGE OF RAISED EXPECTATIONS 7

EAGER CONSUMERS 9

THE NEED TO SATISFY 15

Performance and Profits 16

Growing Dissatisfaction 19

Leaders and Laggards 21

MEETING EXPECTATIONS 23

APPENDIX 27

T A B L E O FC O N T E N T S

4

A B O U T T H E A U T H O R S

About the Authors

Michael Silverstein is a senior vice president in the Chicago office of The Boston Consulting Group. PeterStanger is a vice president and Nina Abdelmessih a manager in the firm’s Toronto office.

Acknowledgments

We would like to thank the many consumers who shared their experiences with us. Our special thanks go tothe BCG project team, which includes Deidre Sorensen, Kirstyn Davidson, Karen Sterling, Bruce Townson,and Lina Maiato. We would also like to thank members of our E-Commerce practice area, James Vogtle andMartine Holmsen, as well as our editorial team of Tom Teal, Sally Seymour, and Katherine Andrews, and ourproject adviser, Jill Black.

For Further Contact

The ideas in this report represent ongoing learning based on BCG’s client work and research. We welcomeyour questions and feedback. For inquiries about this report or BCG’s E-Commerce practice, please contact:

Michael SilversteinSenior Vice PresidentThe Boston Consulting Group, Inc.E-mail: [email protected]

Peter StangerVice PresidentThe Boston Consulting Group of Canada LimitedE-mail: [email protected]

Nina AbdelmessihManagerThe Boston Consulting Group of Canada LimitedE-mail: [email protected]

5

I N T R O D U C T I O N

Despite the recent demise of a number of dot-com sites and some dire predictions about the future of e-commerce, consumer enthusiasm for online shopping is rising. In fact, one of the dilemmas of online retail-ing is that consumer enthusiasm is outpacing retailer capabilities. Consumers are doing more shoppingonline and expect to do much more in the future, but they demand a sophisticated level of service. They areunwilling to tolerate slow downloads, inconvenient navigation, limited selection, and checkout failure. Thesuccessful retailers will be those that create a flawless online shopping experience—as good as or better thanthe familiar experience of shopping in bricks-and-mortar stores.

Winning the Online Consumer 2.0: Converting Traffic into Profitable Relationships is the second in a series ofreports focusing on consumer behavior in the online environment. It examines consumers’ expectations andthe extent to which they are currently being met. The report should be of particular interest to retailers, asit discusses various means of converting today’s consumers into long-term, profitable customers.

The report relies on three key sources of insight into online consumer behavior:

• The Boston Consulting Group Q4 2000 Online Purchaser Survey. The Boston Consulting Group conducted aquantitative survey of 2,876 U.S. Internet purchasers during the fourth quarter of 2000. Consumers wereselected from the Harris Interactive database of approximately 8 million Internet users. The data wereweighted to make the sample representative of the U.S. purchasing population—defined as individuals18 years or older, living in the United States, who have purchased a product online at least once in the12 months preceding the survey. To supplement these findings, qualitative one-on-one research was con-ducted with active online purchasers.

• The Boston Consulting Group Q4 1999 Proprietary Consumer Database. In the fourth quarter of 1999, BCGgathered data from 11,151 North American Internet users in two surveys. The Internet Activity Surveywas conducted among 1,958 Internet users. The E-Commerce Survey was conducted among 9,193Internet users who had made at least one purchase through the Internet.

• Harris Interactive e.commercePulse Q2 2000 Database. Harris Interactive e.commercePulse is a quarterly U.S.-based tracking study of the online and offline shopping and purchasing attitudes and behaviors of roughly 100,000 adult online respondents. Using Harris Interactive's Web-based technology, the sur-vey for the second quarter of 2000 was conducted online with 97,633 adult online users at three differ-ent periods over the course of the quarter. The survey covered 266 e-commerce Web sites in 13 verti-cal markets.

7

T H E C H A L L E N G E O F R A I S E D E X P E C T A T I O N S

Over the past year, the promise of e-commerce col-lided head-on with the reality of hard economicmodels. Investors took a close look at the cashrequirements needed to build an online businessand voted with their checkbooks in refusing newrounds of investment. It wasn’t that online shop-ping died. What disappeared was investors’ willing-ness to accept highly optimistic projections as real-istic. Share prices retreated, Web sites closed down,and prospective sites were put on hold as doom-and-gloom stories of “dot-bombs” and bankruptcyfilled the press. It had been easy—perhaps tooeasy—to get funding for an e-commerce site.Suddenly it was too hard. Everyone from seriousplayers to casual observers began to question theviability of online retailing.

The short-term potential for online retailing is cer-tainly not as grand as optimists supposed a year orso ago. But the situation is not as dire as pessimistswould now have us believe. The truth lies some-where in between. To be sure, online retailers havebeen failing in large numbers, and the failures willundoubtedly continue. But while the pessimistshave focused on the supply side of online retail-ing—capital markets, potential returns on invest-ment, financial staying power—there is also ademand side, and it seems to point in a very differ-ent direction. Despite the failures, consumers aremore enthusiastic about shopping and purchasingon the Internet than ever before. They shop more,they purchase more, and they plan to shop and pur-chase still more in the future. And since revenuesare up—and rising—success should be possible. Yetmany online retailers are not making the most of

their opportunities, and one of the reasons is theirinability to meet rising consumer expectations.

Customer satisfaction alone won’t guarantee prof-its, of course, but satisfying customers is much moreimportant than it was in the early days, when bothconsumers and investors were intoxicated by thenovelty of the Internet. To operate profitably, retail-ers need an attractive offering, a defensible com-petitive advantage, and a viable economic model.They also need loyal, profit-producing customerswho will bring in more loyal, profit-producing cus-tomers. An online customer’s value to a retailer isnot in his or her first purchase but in the string ofpurchases that follow that initial trial. Business fail-ure happens when online retailers spend $50 to$100 to entice a consumer to make a first purchaseand then fail to convert that purchase into a streamof ongoing activity.

In fact, what’s happening in e-commerce is really avery old story, and its moral—one that catalogershave known for years—is about acquiring and serv-ing the right customers. Mail order retailers call itRFM—recency, frequency, monetary value—astraightforward, data-driven formula that permitsretailers to segment their customer base and focusattention on the high rollers. Catalogers know theywill succeed if they focus on their best customers:the most recent, the most frequent, and the biggestspenders. Rather than allocate huge sums to attractcustomers whose purchases won’t justify theiracquisition costs, online retailers should segmentcustomers by their potential to produce profits andthen invest resources in the most valuable ones.

8

Online retailers that monitor RFM the way cata-logers do will greatly increase their chances of sur-vival. (See Exhibit 1.)

Satisfying the most valuable customers is vital toonline retail profitability. It leads to loyalty,increased purchases, and advocacy. And advocacyhelps attract more valuable customers, creating avirtuous cycle. But retailers are falling short of thisgoal. Although consumers are purchasing moreonline than ever before and hope to purchase evenmore in the future, their intentions are based onthe expectation that online shopping will work assmoothly as offline shopping. The trouble is, itdoesn’t. Consumers are experiencing more andmore purchasing problems, and their dissatisfac-tion is growing. And although their dissatisfactionturns few of them away from the Internet, it doeskeep them from returning to the sites of offendingretailers.

Despite the importance of satisfying customers,only a few retailers do an outstanding job.Significantly, these companies concentrate not somuch on delighting customers with extraordinaryfeatures as on satisfying them with basic services—asimple, intuitive Web site, a secure paymentprocess; reliable fulfillment—that customers candepend on throughout the purchase experienceand over countless visits. (See the insert “Bigger,Better, Easier: The Top Ten Features of a WinningOnline Retail Site.”)

E X H I B I T 1

P R O F I T A B L E L I F E O R E X P E N S I V E D E A T H ?

Developing customer Serving

relationships traffic

Customer acquisition cost $60 $60

Value of first purchase $100 $100

Value of subsequent purchases $150 $50

Annual purchases per customer 3 1.5

Length of customer relationship 5 years 1 year

Number of customers in 5 years 5 million 500,000

Net present value of customersacquired todayb $220 –$40

Aggregate net present value of 5 years of operationc $100 million –$60 million

SOURCE: BCG analysis.

a Figure decreases to $30 over time.b Discount rate = 15%; based on contribution margin.c Discount rate = 15%; based on EBIT.

a

1. The Web site design optimizes load times for vary-ing access modes.

2. The URL is on all marketing materials.

3. The site’s security is recognized by all browsers.

4. No price surprises occur during the checkoutprocess.

5. No orders are taken if inventory is unavailable.

6. Online selection and availability are equal to orgreater than those at bricks-and-mortar stores.

7. It takes fewer than four screens to complete thecheckout process and fewer than two screens tocomplete express checkout.

8. The site has a comprehensive order-trackingcapability.

9. The site offers precise delivery times.

10. The site provides 24/7 customer service acces-sible through multiple channels.

BIGGER , BET TER , EAS I ER : THE TOP TEN FEATURES OF A W INN ING ONL INE RETA I L S I TE

E A G E R C O N S U M E R S

9

By the fourth quarter of 2000, 78 percent of some123 million Internet users—96 million individu-als—had shopped online at least once.1 Thesenumbers have risen sharply since 1999, when only57 percent of 102 million Internet users, or 58 mil-lion people, had shopped online. Not surprisingly,Internet pioneers—people who came online before1997—have the highest percentage of shoppers at84 percent. What is most promising for the future,however, is the fact that as new users venture onlinetoday, they are quicker to become shoppers thannew users were in the past. In 1999, only 46 percentof consumers new to the Internet tried online shop-ping. In 2000, 72 percent of new users becameshoppers. (See Exhibit 2.) Clearly, online shoppingis no longer a novelty. It is becoming part of theonline consumer’s daily experience, not onlybecause it’s convenient but also because it providescomprehensive product information and compara-tive price data.

More shoppers ultimately mean more purchasers,although the increase in purchasing has been agood deal smaller than the increase in shopping.By the fourth quarter of 2000, 55 percent ofInternet users (68 million consumers) had made atleast one online purchase since coming online, upfrom 51 percent (52 million consumers) a year ear-lier. The increase is evident across all 13 productcategories included in our research. Books remainthe most popular category: 28 percent of online

E X H I B I T 2

S H O P P I N G A N D P U R C H A S I N G A C T I V I T Y B Y T E N U R E

Shopping

1999 2000

0 4020 60 80 100

Pioneers(online since

pre–1997)

First of the masses(online since

1999)

Early followers(online since1997–1998)

Mass market(online since

2000)

Overall

6884

6172

5778

72

4682

NA

% of total

Purchasing

1999 2000

0 4020 60 80 100

Pioneers(online since

pre–1997)

First of the masses(online since

1999)

Early followers(online since1997–1998)

Mass market(online since

2000)

Overall

6064

5650

5155

33

3855

NA

% of total

SOURCES: BCG Q4 2000 Online Purchaser Survey; BCG Q4 1999 Proprietary

Consumer Database (N=3,420 for 2000; N=1,958 for 1999).

1. Online shopping is defined as use of the Internet to browse for or re-search products or prices but not necessarily to purchase. Online purchasingis defined as use of the Internet to order and complete the purchase of aproduct or service.

10

purchase in new categories. Of those online pur-chasers not currently buying in a given category, aremarkable number are willing to try. Leisure travelis far and away the most likely to pick up new usersin 2001, followed by electronics, music and video,and event tickets. (See Exhibit 5.) All in all, con-sumers declare themselves ready to shift a large por-tion of their regular spending online. In six majorproduct categories—leisure travel, event tickets,music and video, computer software, books, andcomputer hardware—at least one-fifth of onlineconsumers say that by 2005 they will do more thanhalf their purchasing online. (See Exhibit 6.)Although intentions aren’t deeds, consumers’online purchasing expectations over the next fiveyears are in line with projected market growth. Weproject that online spending in a subset of productcategories that we examined in depth—books, com-puter hardware, electronics, grocery, health andbeauty, music and video, toys, and leisure travel—

consumers have bought a book in the 12 monthspreceding the survey. Music and video comes in aclose second, followed by computer software inthird place. The highest growth category, however,is toys—now the sixth most popular online cate-gory. (See Exhibit 3.)

Not only are consumers purchasing more onlinetoday, they are also very optimistic about theirspending in every category over the 12 months fol-lowing the survey—particularly in clothes, books,and event tickets. (See Exhibit 4.) Moreover, shop-pers who have been purchasing online are eager to

1999 2000

0 10 20 30

Books

Music/video

Computer software

Clothing

Leisure travel

Toys

Event tickets

Electronics

Computerhardware

Collectibles/auctions

Health/beauty

Grocery

Automobile

2228

1526

1523

1022

1120

417

715

414

914

713

313

27

1.52

% of online consumerswho have purchased in

each category


Consumer Database (N=1,869 for 2000; N=1,958 for 1999).

E X H I B I T 3

I N C R E A S E D O N L I N E P U R C H A S I N G A C T I V I T Y I N 2 0 0 0

E X H I B I T 4

E X P E C T E D C H A N G E I N O N L I N E S P E N D I N G I N 2 0 0 1

Increase Stay the same Decrease

0 30 70 100

Clothing

Books

Event tickets

Toys

Health/beauty

Leisure travel

Music/video

Computer software

Electronics


Automobile

Grocery

Computerhardware

10 20 40 50 60 80 90% of respondents who

have ever purchased in the category

SOURCE: BCG Q4 2000 Online Purchaser Survey (N=107 to 1,564).

11

will reach nearly $170 billion in 2005 from $35 bil-lion in 2000. This represents a fivefold increase infive years.

Finally, there is clear evidence that the overalldemographics of the online population are shift-ing. Whereas Internet pioneers have tended to beyoung, male, and affluent, the online populationtoday is rapidly becoming more middle-class and

“At the beginning, it was more of a game, and I didn’t really expect anything. I was much more forgiving because I knew most

companies were just starting to get their sites up and running. Now I assume everything I want to buy will be online in some

form. I expect that when I do purchase something, they [the retailer] will give me exactly what I bought, they will get it to me on

time and without any hassles.”

Mike, HMO administrator with a design degreeSeven years online, first online purchase three years ago

includes more women and older people. In otherwords, the demographics of online shoppers andpurchasers are now beginning to resemble those ofthe mass market, which means that online retailerscan target any market segment they choose. (SeeExhibit 7, page 12.)

If online purchases are rising, however, onlineexpectations are rising even faster. Despite the rela-

E X H I B I T 5

L I K E L I H O O D O F C O N S U M E R S T O B E G I N P U R C H A S I N G O N L I N E I N E A C H C A T E G O R Y I N 2 0 0 1

Definitely/probably will

May or may not

Probably/definitely not

0

Leisure travel

Electronics

Music/video

Event tickets

Books

Computer software

Toys

Clothing

Computerhardware

Health/beauty


Grocery

Automobile

30 70 10010 20 40 50 60 80 90

% of consumersnot currently purchasing

in the category

SOURCE: BCG Q4 2000 Online Purchaser Survey (N = 1,222 to 2,769).

E X H I B I T 6

2 0 0 5 O U T L O O K : P E R C E N T A G E O F R E S P O N D E N T SW H O E S T I M A T E A G I V E N P R O P O R T I O N O F T O T A LC A T E G O R Y S P E N D I N G W I L L B E O N L I N E

0% Up to 25%

Up to 50%

Up to 100%

0

Leisure travel

Event tickets

Music/video

Computer software

Books

Computerhardware

Electronics


Toys

Clothing

Health/beauty

Grocery

Automobile

30 70 10010 20 40 50 60 80 90

% of respondents whohave ever purchased

SOURCE: BCG Q4 2000 Online Purchaser Survey (N=2,876).

12

E X H I B I T 7

D E M O G R A P H I C S O F O N L I N E P U R C H A S E R S A R E T R E N D I N G T O W A R D T H E G E N E R A L P O P U L A T I O N

Gender

1998

Online purchasing populationa

1999 2000 Onlinepopulation

U.S.population

2000

100%

80

60

40

20

0

Female

Male

Age

1998

50+

49–49

30–39

18–29

100%

80

60

40

20

0



U.S.population

2000

Household Incomeb

1998

50K+

25–50K

<25K

100%

80

60

40

20

0



U.S.population

1999c

Education

1998

Graduate degree

Somecollegeto collegedegree

High school graduate or less

100%

80

60

40

20

0



U.S.population

2000

SOURCES: BCG Q4 2000 Online Purchaser Survey (N=821 to 3,463); U.S. Census Bureau estimates.

a Base is respondents who have made a purchase online in or before the stated year.b Excludes respondents who declined to answer.c Data not yet available for 2000.

tive newness of the medium, consumers expectonline shopping to be as good as offline shopping,or even better. There are several reasons for con-sumers’ high expectations. For one, the media havehyped online shopping as cheaper, easier, and moreefficient than offline shopping could ever be. Foranother, consumers have improved their Internetproficiency, and they expect no less of the retailersthey do business with. Yet another reason thatconsumers expect more today is that the initial nov-elty of online shopping has worn off. More andmore consumers go online not simply to be enter-

tained or to see what’s there but to get things done.They are more interested in working through theirto-do lists than in having an adventure. The honey-moon is over.

Moreover, as the Internet becomes just one of manyshopping channels—and shoppers jump routinelyfrom one to another—consumers will expect a con-sistent brand image and quality of purchase experi-ence across all channels. (For an example of onlineshopping at its best and worst, see the insert “A Taleof Two Sites.”)

13

When it is good, an online shopping site can be very, very good. But when it is bad, it is beyond forgiving—as Dougand Barbara discovered.

DOUG’S STORY

A few weeks before Christmas, Doug decided to avoid the crowds and do some of his shopping online. He plannedto buy a talking doll for his daughter Kathy and a cappuccino maker for his wife Barbara. His first—and, he hoped,only—stop would be the new online site of the region’s largest department store.

At first it seemed almost too easy: type in the URL and the home page appears immediately. But after he lookedover all the information on the page about products, sales, promotions, menus, and search options, he was amazedto discover no listing for toys—let alone dolls. Fifteen minutes of searching turned up a scooter, but no dolls. Heknew the store had the dolls—Kathy had pointedly left yesterday’s paper open to an ad for them—so he decided tocall and place his order over the phone. Only he couldn’t find the phone number. After another ten-minute search,he gave up, clicked the “contact us” link, and typed out an e-mail query about the talking doll he wanted, hopingto receive a reply while he continued to shop.

Back up at the search box, he typed in “cappuccino maker.” The screen went blank, and a few seconds later a mes-sage appeared: “The search item was not found. To send a gift certificate, click below.” Refusing to give up, he went to the category menu and, after drilling down several layers, made his way to the coffee makers—and finallyto espresso machines. Only two were listed. Just to be sure that he had found all the machines the store offered,he changed his search to “espresso machine” and this time received a list of six products, including two “icedcappucino machines.” He was not pleased to realize that his earlier search had failed because he—unlike thestore—had spelled cappuccino correctly.

But now he was on the homestretch. All he had to do was choose the machine he wanted and order it.Unfortunately, that, too, turned out to be a lesson in frustration. The description of one machine indicated that ithad a “15 bar pressure system,” a feature that meant nothing to him. And because each description listed differentfeatures, there was no way to compare them. If he were in the store, he would simply ask a salesperson for help,but that wasn’t an option here. He tried the hyperlink to the warranty information and received the following mes-sage: “Write to the address below to get a copy of the warranty before purchasing.” No time for that.

Lacking any real criteria for making a decision, Doug simply chose the machine with the most features and receivedthe message that the item had been added to his cart. Next stop, checkout. But not so fast. A new messageappeared—“command execution error”—and his screen went blank. Doug really didn’t care about the cappuccinomachine anymore. Nevertheless, he decided to give the site one more chance and try again that afternoon. He wentback three hours later, and, to his surprise and immense relief, he advanced quickly through the screens to check-out without a hitch. Then he confronted the billing form. He needed the gift in 10 days—sufficient time, he thought,for regular mail. Unfortunately, according to the site, regular shipping could take up to 17 days. But for a higherprice, he could have express delivery. He clicked on “express delivery” and was halted once again. A message

A TALE OF TWO S I TES

14

informed him that he had neglected to supply his first name. He was sure he had given both names, but there wasno choice but to go back and fill out the entire order form again. The first-name error message reappeared, and hehad to fill out the form a third time. Finally, the order went through—although he had done nothing differently. Totaltime shopping: two hours. Items purchased: one.

BARBARA’S STORY

Unbeknownst to Doug, Barbara had also decided to do her Christmas shopping online. She thought she’d get Kathya talking doll and splurge on a cappuccino machine for Doug. Barbara was eager to try the “one-stop-shop” site thata friend had raved about. She reached the site with no trouble and went immediately to the “toys” link at the topof the home page. There were several product categories to choose from, so, to save time, she decided to searchfor the item directly. She clicked on “advanced search” and typed in “talking doll.” The search returned six kinds oftalking dolls, one of which she immediately recognized as the one her daughter wanted. She was about to click on“customer service” for shipping costs when she noticed the shipping charge clearly indicated beneath the price anda complete description of the product (including the fact that she would need to buy batteries). She added the itemto her cart and proceeded to search for a cappuccino machine.

The correct spelling of cappuccino produced a list of four machines. Barbara chose three with different levels of func-tionality to compare. The description of the most expensive machine was a bit skimpy, but the other two came withlong lists of features and an explanation of each feature. Still not sure, Barbara decided to seek advice by clickingthe “online chat” button on the “customer service” screen. A sales rep responded immediately and suggested amachine that was one of the three on her short list. He also provided a brief description of the warranty. She addedthe machine to her shopping cart and proceeded to checkout.

As a new customer, Barbara had to register and provide shipping and billing information. But before she could pro-ceed, she received a message saying her phone number was invalid. She went back, and, sure enough, she hadneglected to include her area code. Unfortunately, her credit-card information had been deleted so she had to fill itout again, but the rest of the order remained intact. On the next page, she was given six separate shipping options.The longest—seven to ten days—was cutting it close to the holiday, so she chose a slightly more expensive alter-native. The final screen reviewed her charges, and she completed her order. Total time shopping: 20 minutes. Itemspurchased: two.

CHRISTMAS MORNING

On Christmas morning, Barbara’s presents for her family were under the tree, having arrived in perfect conditiononly three days after she placed the order. Thanks to the ineptitude of Doug’s department-store site, the family wasspared redundant talking dolls and cappuccino machines. Having received no reply from the site to his query aboutthe doll, Doug bought his daughter a dollhouse instead (purchased at the department store’s online competitor). Asfor the cappuccino machine, it finally arrived a week after Christmas with one part broken. The final insult was thatDoug had to return it at his own expense.

15

T H E N E E D T O S A T I S F Y

Consumers are growing impatient with less-than-satisfactory purchase experiences, and that oughtto be reason enough to intensify the focus on cus-tomer satisfaction. But there is an even greaterincentive for doing so, one that bears directly onthe bottom line. Our research shows that satisfiedonline customers shop more, spend more, and pur-chase more frequently and across more categories.The positive impact of satisfied customers—and thenegative impact of dissatisfied ones—have a greatercompounding effect on the bottom line than mostretailers realize.

Consider the following numbers. According to theirresponses to 17 satisfaction criteria, online con-sumers in the least satisfied cluster spent an averageof $428 online over the preceding 12 months,whereas those in the most satisfied group spent$673. The latter group also engaged in nearly 50 percent more transactions, completing an aver-age of 9.4 transactions in the preceding year, com-pared with 6.5 for the least satisfied group. In addi-tion, data collected by Harris Interactive indicatethat satisfied shoppers purchase in more categories,with nearly one-quarter purchasing in three ormore categories in a specific one-month period. Bycontrast, more than 60 percent of the dissatisfiedshoppers made no purchases at all during thatmonth. (See Exhibit 8.)

A satisfied customer is also more likely to return toa Web site for additional purchases and, equallyimportant, to recommend the site to others. Ourstudy found an almost perfect correlation betweenoverall satisfaction ratings and likelihood to recom-mend a site. In the retail world—where word of

S A T I S F I E D P U R C H A S E R S S P E N D A N DT R A N S A C T M O R E A C R O S S M O R E C A T E G O R I E S

Average Online Spending in the Preceding 12 Months

Most satisfied online purchasers Least satisfied online purchasers

$673

$428

$800

600

400

200

0

57% increase

Average Number of Transactions Made in the Preceding 12 Months

9.4

6.5

10

2

4

6

8

0

Number of transactions

Most satisfied online purchasers Least satisfied online purchasers

SOURCE: BCG Q4 2000 Online Purchaser Survey.

NOTE: Purchasers were classified into three satisfaction clusters based on their

average satisfaction in 17 areas and the consistency of their satisfaction scores

(most satisfied N=759; least satisfied N=342).

Number of Categories Purchased in

34+

2

1

None

100

20

40

60

80

0

% of respondents

Satisfied shoppers Dissatisfied shoppers

SOURCE: Harris Interactive e.commercePulse Q2 2000 Database.

NOTE: Categories purchased in reflect only those purchased in the month

prior to the survey (satisfied shoppers N=11,684; dissatisfied shoppers N=4,521).

E X H I B I T 8

16

satisfied customers plan to do so. Conversely, 25 percent of the least satisfied purchasers intendto shift none of their music-and-video spendingonline compared with only 14 percent of the mostsatisfied purchasers. (See Exhibit 11.) These pat-terns occur in clothing, leisure travel, and all othermajor categories not shown in the exhibit.

P E R F O R M A N C E A N D P R O F I T S

Two of the most valuable results of improved cus-tomer satisfaction are increased loyalty and advo-cacy. Loyal customers buy more and more often,and the combined effect of higher purchasing fre-quency and higher average order size results invery satisfied customers spending 57 percent morethan dissatisfied ones. Thus, satisfied customersmore quickly amortize the high cost of customeracquisition and become profitable. Advocacy, the

mouth is a powerful marketing vehicle and a goodway to lower customer acquisition costs—having sat-isfied customers recommend a site is a tremendouscompetitive advantage. (See Exhibit 9.)

Not surprisingly, the most satisfied customers alsointend to purchase more in 2001. In computer soft-ware, for example, 34 percent of the most satisfiedpurchasers plan to increase their online softwarespending next year, whereas only 25 percent of theleast satisfied purchasers plan to do so. Even moredramatic is the intent to purchase less: 33 percentof the least satisfied customers plan to decreasetheir purchases compared with only 14 percent ofthe most satisfied customers. (See Exhibit 10.)These patterns occur in books and in all othermajor categories not shown in the exhibit.

Satisfied customers are also more optimistic abouthow much they will spend over the long term.When asked about their spending plans for 2005,the most satisfied purchasers were significantlymore likely than the least satisfied purchasers to saythey would make a majority of their purchases inany given category online. In music and video, forinstance, 28 percent of the most satisfied customersplan to shift 50 to 100 percent of their spendingonline, whereas only 16 percent of the least

E X H I B I T 1 0

S P E N D I N G I N T E N T I O N S O F P U R C H A S E R S I N S E L E C T C A T E G O R I E S I N 2 0 0 1

Books

Most satisfied online purchasersa

Increase

Same

Decrease

Least satisfied online purchasersa

100

75

50

25

0

32 28

59

9

52

20

% of total category purchasers

Computer Software

Most satisfied online purchasersa

Increase

Same

Decrease

Least satisfied online purchasersa

100

75

50

25

0

3425

52

14

42

33

% of total category purchasers


a Purchasers were classified into three satisfaction clusters based on their average

satisfaction in 17 areas and the consistency of their satisfaction scores


E X H I B I T 9S A T I S F A C T I O N D R I V E S L O Y A L T Y A N D A D V O C A C Y

Overall satisfaction rating

Repurchase

Recommend

10

6

8

4

2

1 2 3 4 5 6 7 8 9 100

Average likelihood to repurchase/recommend

SOURCES: Harris Interactive e.commercePulse Q2 2000 Database (based on 30,923

responses); BCG analysis.

17

E X H I B I T 1 3

T H E L O Y A L T Y P Y R A M I D : T H EB E N E F I T S O F S A T I S F Y I N G C U S T O M E R S

Advocacy

Loyalty

Purchase

Awareness

Satisfying experience

Merchandising

Marketing

• Lower customer-acquisition and retention costs

• Increased traffic• Higher conversion rate

• Increased number of repeat customers

• More frequent and larger orders

Key drivers Impact on retailer performance

SOURCE: The Boston Consulting Group, 2001.

E X H I B I T 1 1

A N T I C I P A T E D P R O P O R T I O N O F 2 0 0 5 C A T E G O R Y S P E N D I N G T O B E T R A N S A C T E D O N L I N E I N S E L E C T C A T E G O R I E S

Mostsatisfied

Leastsatisfied

Music/video

76–100%

51–75%

26–50%

1–25%

0%

100

80

60

40

20

0

% of respondents

Mostsatisfied

Leastsatisfied

Clothing

Mostsatisfied

Leastsatisfied

Leisure travel


NOTE: Purchasers were classified into three satisfaction clusters based on their average

satisfaction in 17 areas and the consistency of their satisfaction scores


E X H I B I T 1 2

V I R T U O U S C I R C L E O F S A T I S F Y I N G O N L I N E C U S T O M E R S

Online experiencemeets customer

expectations

Continuous improvements to online

retail experience

Increased conversionrate and purchase size

Increased loyalty

Increased advocacy

Improved retailereconomics


“Shopping online is so convenient. I see the item pictured, and after a couple of clicks, they [the retailer] will deliver it to me

and I’ve got it! I found a great site for electronics. I must have given that site name to 50 people over the last two weeks. Just

about everyone I work with is online, and we are always passing site names around.”

Tony, engineerTen years online, first online purchase four years ago

ultimate form of loyalty, contributes at least threeadditional benefits: lower customer-acquisitioncosts, lower customer-retention costs, and highercustomer-conversion rates. (See Exhibit 12.) It ben-efits customer retention by reinforcing a positivepicture of the retailer in the mind of the customerwho makes the recommendation. People whoreach a site as a result of a recommendation aremuch more likely to purchase than those attractedby conventional marketing techniques. This phe-nomenon is reflected in a higher conversion rate—the number of buyers divided by the number ofunique visitors to a site—and has a dramatic effecton profitability. (See Exhibit 13.)

18

E X H I B I T 1 4T H E P R O F I T D R I V E R F R A M E W O R K : S A T I S F I E D C U S T O M E R S I M P R O V E K E Y E L E M E N T S O F O N L I N E R E T A I L E R E C O N O M I C S

Operating profit

Revenue

COGS

Operating costs

Transactionalrevenue

Supplemental revenue

Acquisition cost/visitor

Retention cost/customer

Site developmentand maintenance

Fulfillmentcost/order

Customer servicecost/order

Number of customers

Revenue/buyer

Cost/customer contact

Customercontacts/order

Number of uniquevisitors

Buyers/unique visitors

Orders/buyer

Revenue/order

New

Orders/buyer

Revenue/order

Repeat

New Repeat

=Drivers affected by customer satisfaction


The Profit Driver Framework illustrates how theseperformance metrics relate to the operating prof-itability of online retailers. (See Exhibit 14.) It sep-arates revenue and operating costs into their com-ponent parts and highlights the metrics most af-fected by customer satisfaction. Note the range ofmetrics influenced by customer satisfaction.Satisfied customers behave differently than dissatis-fied ones, and this behavior has a positive effect onmany of the most important drivers of online re-tailer operating profits.

In fact, satisfying customers at every stage of thepurchase process can have a combined effect largeenough to push the average online retailer into the

black. Exhibit 15 shows the effects of realistic per-formance improvements on a hypothetical averageonline clothing retailer, moving the company froman operating loss of 78 percent of revenue to anoperating profit of 7 percent. Achieving theseresults does not assume best-in-class performanceon any dimension. The performance we assume forour customer-satisfying site might be characterizedas slightly above average and well within the reachof many online retailers. If we look instead at thetop 10 percent of retailers, they achieve conversionrates above 9 percent, and 67 percent of their salesare to repeat customers. That level of conversionand loyalty performance would produce an operat-ing profit of 14 percent in our model.

19

Note, however, that success depends on improvingperformance on all dimensions at the same time.Increasing the number of unique visitors or theproportion of repeat customers will improveresults, but no single lever will put profitabilitywithin reach. (See Exhibit 16.) Our typical onlineretailer will get the results it wants only by movingall the levers in unison—which is precisely what sat-isfying customers will achieve.

G R O W I N G D I S S A T I S F A C T I O N

Unfortunately, the online experience offered byretailers today is falling short of consumer expecta-tions. This failure is troubling not only becausemore consumers are being disappointed but alsobecause they are less tolerant of disappointment.Reports of purchase problems have become muchmore widespread in the course of 2000 across allaspects of the purchase experience, from naviga-tion to delivery. That is not to say that retailers havenot responded to problems, only that the re-sponses have been inadequate to meet rising con-sumer expectations. (See Exhibit 17, page 20.)

Almost 70 percent of online consumers report thatsome sites take too long to load, and more thanhalf say that a Web site has crashed before theycould complete a purchase. What is worse, as manyas one-fifth of all online consumers have had diffi-culty in getting a Web site to accept their creditcards—a particularly disturbing development forpeople who are uneasy to begin with about releas-ing credit-card information online. Moreover, asmany as 11 percent of consumers have at some timeordered and paid for products that they neverreceived—a decidedly unpleasant end to the pur-chase experience.

SOURCES: The State of Online Retailing 3.0 (a Shop.org study by The Boston

Consulting Group), performance benchmarks; BCG analysis.

E X H I B I T 1 5

S A T I S F Y I N G C U S T O M E R S C A NS I G N I F I C A N T L Y A F F E C T T H E B O T T O M L I N E

Hypothetical Online Clothing Retailer

Average Online retailerSatisfaction levers online retailer that satisfies

Conversion rate (buyers/unique visitors) 1.8% 4%

Unique visitors (index to 100) 100 125

Proportion of repeat customers 21% 35%

Number of orders per year/customer 2 3

Ratio of repeat-order revenue to 120% 150%first-time-order revenue

Operating profit/loss as % of revenue –78% 7%

Profitability is within reach for the typical retailer.

E X H I B I T 1 6I T T A K E S M O R E T H A N O N E L E V E R T O R E A C H P R O F I T A B I L I T Y

Hypothetical Online Clothing Retailer

AverageSatisfaction levers online retailer Impact of a single lever on operating profitability

Conversion rate (buyers/unique visitors) 1.8% 4.0% 1.8% 1.8% 1.8% 1.8%

Unique visitors (index to 100) 100 100 125 100 100 100

Proportion of repeat customers 21% 21% 21% 35% 21% 21%

Number of orders/year/customer 2 2 2 2 3 2

Ratio of repeat-order revenue to first-time-order revenue 120% 120% 120% 120% 120% 150%

Operating profit/loss as % of revenue –78% –21% –62% –65% –61% -67%

SOURCE: BCG analysis.

Greatest decrease in satisfaction

20

In general, satisfaction rates are falling and dissat-isfaction rates rising. Complaints about beingunable to contact customer service have tripledsince 1999 and continue to grow, whereas reports oflong delivery times and difficulty returning prod-ucts have more than doubled. In 1999, 61 percent of consumers were satisfied with thereturn processes they encountered. In 2000, thatnumber dropped to 39 percent. (See Exhibit 18.)

Retailers cannot afford to ignore these statistics,because consumers are more and more likely to acton their disappointment. Some 60 percent of con-sumers changed their behavior in 2000 as a result ofa failed purchase compared with 54 percent in1999. The impact on individual retailers is particu-larly harsh, as consumers are increasingly moreinclined to punish offending sites than to blame theInternet as a channel. Only 2 percent of consumerswho experienced a failure say they will give up ononline shopping altogether compared with 6 per-cent in 1999, whereas 41 percent say they will stopshopping at a particular site—up from 28 percentin 1999. (See Exhibit 19.) In other words, con-sumers are beginning to treat Web sites the sameway they treat bricks-and-mortar stores. They don’tstop shopping because of a bad experience; theyjust stop buying from the offending merchant.

1999 2000

I found the right Web site, but the page took too long 56 69to load.

I found the product I wanted on the Web site, but it was 40 67not available.

I found the right Web site, but the site was too confusing/ 53 62difficult to navigate.

The system crashed before I could complete my purchase. 32 53

I ordered and paid for the product, but it took much longer 20 47than expected to arrive.

It was necessary for me to contact customer service to 26 42complete my transaction.

I tried to contact customer service but was unable to. 11 35

I had to return the product after inspecting it. 12 28

I couldn’t get the Web site to accept my credit card. 12 21

I ordered and paid for the product, but it never arrived. 6 11

The wrong product arrived, but I kept it anyway. 6 11

I provided my credit-card number and subsequently 6 8received unauthorized charges.


Consumer Database (N=1,869 for 2000; N=878 for 1999).

NOTE: Incidence is defined as the percentage of the online purchasing population having

experienced the problem at least once in the preceding 12 months.

E X H I B I T 1 7

I N C R E A S E D I N C I D E N C E O FP U R C H A S E P R O B L E M S

P E R C E N T A G E O F P U R C H A S E R S S A T I S F I E D / D I S S A T I S F I E D W I T H E L E M E N T S O F T H E P U R C H A S E P R O C E S S

Very/somewhat Neither Very/somewhat satisfied dissatisfied

1999 2000 1999 2000 1999 2000

Navigation 88 84 9 12 3 4

Offering 84 79 13 17 3 4

Order process 84 79 13 17 3 4

Delivery 70 69 22 20 8 11

Returns 61 39 34 54 5 7

Customer service 60 57 34 37 6 6

E X H I B I T 1 8

SOURCES: BCG Q4 2000 Online Purchaser Survey; BCG Q4 1999 Proprietary Consumer Database. (N=1,869 for 2000; N=9,190 for 1999).

NOTE: Each of the six categories are aggregations (averages) of one to four related elements.

Highest level of dissatisfaction

21

and a more complicated purchase process. Leisuretravel is among the most complex of online pur-chases, featuring a vast number of choices for itsmost basic product: roundtrip air tickets. Leisuretravel and computer hardware also have averageorders of more than $300.

Still, the two rules are not without exceptions.Although few Web sites stand out as either verygood or very bad in the eyes of consumers, we nev-ertheless found superior sites in all of the retail cat-egories we studied. Half.com, Southwest, iQVC,and Amazon are among the top-performing sites incustomer satisfaction. Not surprisingly, all fourfocus on the basics of online retailing: a simple,intuitive Web site; a secure payment process; andreliable fulfillment. (See the Appendix, page 27.)We also found Web sites that underperform on cus-tomer satisfaction, such as Furniture.com, Macy’s,Sears (clothing), Bestbuy (computers), and Lego—all of which fail to deliver on these same basics.(See Exhibit 21, page 22.)

L E A D E R S A N D L A G G A R D S

Some categories are doing a better job of satisfyingcustomers than others. Two general rules apply.First, the more expensive the product, the moresensitive customers become to flaws in the purchaseprocess. Second, the more complex the product—and the more time and involvement required of thecustomer—the higher the likelihood of problems.

Online book retailers and health-and-beauty retail-ers stand out as the best performers, with 31 per-cent of customers who say they are very satisfied.Books are also notable for having by far the lowestnumber of customers who are dissatisfied: 7 per-cent. These results stem in part from product char-acteristics—low-cost, standardized offerings thatare easy to purchase—but a strong contributing fac-tor is the influence of Amazon.com, which has oneof the most robust and reliable order-and-fulfillment processes in the industry. Moreover,Amazon constantly strives to deliver a superior cus-tomer experience with innovations such as recom-mendation engines, peer reviews of books, andone-click ordering. (See Exhibit 20.)

At the other end of the spectrum, leisure travel,computer hardware, and electronics have the low-est numbers for customer satisfaction and the high-est for dissatisfaction—probably a result of the factthat these categories offer higher-priced products

E X H I B I T 1 9F A I L U R E S A R E B L A M E D O N T H E S I T E , N O T T H E C H A N N E L

Percentage of consumers experiencing purchase failures who agree

1999 2000

I stopped shopping online. 6 2

I stopped purchasing online. 10 2

I stopped shopping at that particular Web site. 28 41

I stopped purchasing at that particular Web site. 23 30

I stopped shopping at that particular company ’s offline stores. 6 9

SOURCES: BCG Q4 2000 Online Purchaser Survey; BCG Q4 1999

Proprietary Consumer Database (N=948 for 2000; N=376 for 1999).

E X H I B I T 2 0

R E L A T I V E P E R F O R M A N C E O F C A T E G O R I E S O N C U S T O M E R S A T I S F A C T I O N

% dissatisfied

35

30

25

20

20 15 510

15

% completely satisfied

Music/video

Toys

Home/garden

ElectronicsLeisure travel

Clothing

Computerhardware

Health/beauty Books

SOURCE: Harris Interactive e.commercePulse Q2 2000 Database; BCG analysis.

NOTE: Base includes site experiences. Ratings are on a 10-point scale. “Completely

satisfied” ratings include 10s only, whereas “dissatisfied” ratings are between 1 and 5.

22

E X H I B I T 2 1

T H E W I D E V A R I A N C E I N S I T E P E R F O R M A N C E

% of dissatisfied customers

% of completely satisfied customers

Loved and hated

Undifferentiated

OutstandingExamples:Amazon (books)HalfMaryKayQVC (clothing)Southwest

UnderperformingExamples:Bestbuy (computers)Furniture.com LegoMacy ’s (clothing)Sears (clothing)Vitaminshoppe

1040

10

0

20

30

60

2030 0

40

50

SOURCES: Harris Interactive e.commercePulse Q2 2000 Database; BCG analysis.

NOTE: Sites that sell in multiple categories are represented for each category that they have been rated in. Ratings are on a 10-point scale. “Completely satisfied” ratings include 10s only,

whereas “dissatisfied” ratings are between 1 and 5.

23

M E E T I N G E X P E C T A T I O N S

The message is clear: the quality of the purchaseexperience matters. Satisfied customers spendmore, are more loyal, and are more likely to rec-ommend their favorite sites, and all these factorshave a powerful effect on retailer economics.Successful retailers will recognize the power of cus-tomer satisfaction and focus on the delivery of arobust end-to-end experience for both new andexperienced shoppers.

To achieve this focus, retailers must first measuretheir current performance in specific areas of cus-tomer satisfaction and then compare the results torealistic benchmarks. Using data from The State ofOnline Retailing 3.0, a Shop.org study by The BostonConsulting Group, we have defined performancebenchmarks for most elements of the customerexperience. (See Exhibit 22.)

Having measured their current performance,retailers then need to look at the areas where com-petitors have a performance advantage, assess therelative importance of such gaps, investigate theroot causes of the gaps, and take action to improvetheir own operations. The goal is to give consumersflawless performance, not just in terms of Web sitefunctionality but throughout the purchase experi-ence—which should include search and compari-son tools, inventory status indicators, and customerservice access. The checklist in Exhibit 23 on page24 can help retailers identify specific areas for per-formance improvement. A flawless purchase expe-rience consists of the following critical elements:

Site and Brand Awareness. In the rush to go online,retailers sometimes ignore marketing basics. Itgoes without saying that a retailer’s marketing mes-sage should be targeted to a specific consumeraudience. Every retailer must understand who itspotential customers are, then create messages spe-cific to those consumers and their needs. Onlineretailers are no exception. Moreover, using mar-keting resources more efficiently minimizes cus-tomer acquisition costs, generating savings that fallalmost directly to the bottom line.

Multichannel retailers also need to make sure thatthe message and the customer experience are con-sistent across channels. As the Internet buzz sub-sides and consumers begin to view the online me-dium as simply another way to shop, retailers thatoffer a seamless transition between channels will have a clear competitive advantage. At its best,the branding in each channel will reinforce theoverall brand. For instance, the Gap tries to bring

E X H I B I T 2 2

O N L I N E R E T A I L P E R F O R M A N C E T A R G E T S

Metric Target Current range

Revenue per order Varies by category $15–$1,000

Customer acquisition cost $20–$30 $5–$150

Buyer conversion 5% 0.2–12%

Revenue from repeat customers 50% 10–75%

Abandoned shopping carts 40% 20–90%

Inbound consumer contacts per order 0.4 0.1–1.4

On-time fulfillment 95–100% 65–99%

Completely filled orders 95–100% 60–99%

Returns as % of sales 3% 1–30%


24

E X H I B I T 2 3

T H E F L A W L E S S P U R C H A S E E X P E R I E N C E

Purchase process Consumer needs Checklist

“Customer service is convenient and responsive.”

“The site is secure, and I can place my order quickly.”

“The product I am looking for is offered and in stock.”

“It is easy to get around the site, and I can get where I need to go quickly.”

“I can find the site.”

! Simple, clearly defined return process! In-store return process for multichannel retailers

! Multichannel customer-service contact (e-mail, 800 number, fax)

! 24/7 response! Customer service representatives with authority to make

decisions and offer full assistance

! Inventory status indicated at time of search! Intuitive and simple order process, with express checkout option! Prices, taxes, and shipping costs transparent and displayed prior

to start of checkout process! High level of security and privacy, well communicated to the user! Order confirmation and easy, up-to-date tracking

! Ready access to assistance and search capabilities! Comprehensive offering, allowing for full product comparisons! Rich information to facilitate comparison! Assistance in selection/navigation through offerings! Carefully managed product offerings across channels

! Easy to navigate! Features tailored to user ’s needs and mode of access

! Clear target marketing message! Consistency of message and customer experience across

channels (if applicable)! Easy-to-remember URL

“The product arrives intact and on time.”

Siteawareness/brand

Site navigation

Product offering/ selection

Order placement

Delivery

Customer service

Returns“The return process is clearly defined, simple, and not financially burdensome or time consuming.”

“Why would I go anywhere else?”

! Reliable and consistent delivery! Precise delivery windows! Multiple delivery options, in keeping with economics

and brand positioning

Repeat purchase


25

the “look and feel” of its retail stores onto its Website and so reinforces its offline image. Conversely,the Gap reinforces its Web site in its stores by adver-tising the URL and providing kiosks with on-line access.

Site Navigation. A Web site must be easy to navi-gate, with ready access to assistance and searchcapabilities. It should tailor its features to the user’sneeds, which means not only personalization—avirtual requirement today—but also recognizingthat different consumers use different modes ofaccess, have different connection speeds, andemploy different software and plug-ins. Sites mayalso need to include entertainment value to makethem more than a catalog of products.

Southwest is a highly intuitive and easy-to-use sitewith a simple, logical design and clear instructions.Wal-Mart, by contrast, had difficulty creating aneasy-to-navigate interface and an effective searchcapability and has relaunched its Web site severaltimes, most recently in the fourth quarter of 2000.

Product Offering and Selection. A good Web site’soffering must be comprehensive and allow forproduct comparisons on a variety of dimensions,such as features, prices, warranties, and reviews.When information is especially rich, sites shouldoffer additional assistance in selection in order topresent consumers with a smaller number of rele-vant product choices. Shoppers need a clear pres-entation of prices, taxes, and shipping costs beforethey begin the checkout process. Inventory statusshould be clearly indicated at the time of search,not after the customer has placed the order. Bricks-and-mortar stores can go one step further and inte-grate their inventory systems, allowing customers tosee availability both online and at the local store.Circuit City has done this quite effectively.

Ordering. The ordering process should be intuitiveand simple. It must also guarantee—and demon-strate—a high level of security and information pri-vacy. Browsers must be able to recognize secureWeb sites so they can display that information tothe user. (We found well-known sites where this didnot occur.) Additional information on privacy

issues should be readily accessible. Sites should alsohave an express checkout option that reduces thenumber of separate screens the user must passthrough and the amount of data they must enter.Once the order is placed, the customer shouldreceive confirmation and information about ordertracking. Dell, for one, offers an excellent real-timeorder-tracking system from build-to-order status tothe carrier’s delivery status, with e-mail notificationof shipment.

Delivery. Delivery should be reliable and consistentwith the retailer’s economics and brand position-ing, while maintaining maximum flexibility. It makes no economic sense to overdeliver—including overnight delivery, for instance, whencustomers are content to wait two or three days. But since customers’ needs differ, it’s important tooffer options. Outpost.com (Cyberian Outpost) is agood example of a Web site at the leading edge ofalmost every aspect of delivery—with same-daydelivery, free overnight delivery, and regularground delivery. The site also communicates prod-uct availability and expected delivery times prior tocheckout. Moreover, the Outpost system builds inefficiency by shipping same-address orders placedwithin a 24-hour period as one order with a singledelivery charge.

Customer Service. Of all the aspects of online shop-ping, the greatest increase in dissatisfaction in 2000occurred in customer service. We heard complaintsabout the efficiency and effectiveness of service aswell as the number of access points and the rangeof services offered. By proactively dealing withpotential problems and providing a truly self-serveenvironment, retailers can minimize the need forcustomers to contact them for assistance. But aneffective and efficient customer-service system mustbe available when customers need it. Today toomany customers struggle in vain to get assistancewith even the simplest problems.

The basic requirements of customer service aremultichannel contact (phone, e-mail, fax) and24/7 response. We found several Web sites thataccepted e-mails but never replied to them. Othersfeatured “live chat” help services staffed by repre-

26

sentatives who had neither the authority nor theknowledge to provide real assistance. Of course,many retailers do have excellent customer service.For example, Outpost and Lands’ End offer a rangeof contact methods and respond quickly to allqueries. Another helpful site, 800.com, offers live-chat assistance that simulates a salesperson in aretail store environment—a necessity for complexpurchases like personal electronics. A transcript ofthe session is then e-mailed to the user so that theinformation can be reviewed and reused.

Customer service deserves special emphasis not justbecause of the obvious loss to both retailer and cus-tomer when assistance is unavailable. It is alsoimportant because it gives retailers insight into con-sumer thinking, a means of learning more aboutthe satisfactions and dissatisfactions that shoppersexperience every day. Better customer service ben-efits retailers not only because it helps them makethe sale but also because it lets them delve deeperinto customers’ reactions and allows them to usethat knowledge to improve their offerings.

Returns. Returns remain a major concern foronline consumers, and only a few retailers haveresponded to calls for a smoother process. Returnsoffer multichannel retailers a particular challengeand opportunity. Many customers would prefer tomake returns at a local store, but for most retailers,this process is still cost-prohibitive. Retailers thatcan develop a cost-effective method of meeting this demand could gain a significant competitiveadvantage.

Online retailers without in-store return optionsneed to focus on the ease of returning and replac-ing products and on reimbursing the costs incurredby the customer in the process. The solution can beas simple as providing return shipping labels andclear, detailed instructions. Outpost, for example,offers an easy-to-follow guide to product returnsand, in appropriate cases, is careful to reimbursenot only the product’s price but also the deliveryand return charges. Retailers should authorize

their customer service representatives to make deci-sions and provide the necessary level of assistanceto the customer. For example, in cases where theproduct is defective and returning it may not becost-effective, customer service representativesshould be empowered to decide whether simply tosend a new product or have the old one shippedback first.

* * *Giving online consumers what they want doesn’thave to involve giving them more than they want oreven more than anyone else will give them. It sim-ply means performing consistently on all the essen-tial elements of online retailing: large selection,competitive prices, a user-friendly site, secure pay-ment processing, reliable fulfillment, prompt andappropriate customer service, and hassle-freereturns. Because disappointed customers are morelikely to punish a site by never returning thandelighted ones are to reward a site with continuedpurchases, reliability and consistency are crucial. AWeb site the customer can count on to produce sat-isfactory service is preferable to one that tries toimpress with a high-wire act that sometimes worksand sometimes doesn’t.

Up to now, most retailers have focused on buildingawareness and bringing traffic to their sites.Meanwhile, consumers have been so taken with thenovelty of the Internet that they have been willingto keep trying when a transaction didn’t go assmoothly as they expected. That environment haslured many retailers into believing that an onlinepresence was enough. Now that the grace period isover, what counts is the quality of the day-to-dayexperience. Today’s online consumer is less con-cerned with novelty than with taking care of thebusiness of life as efficiently as possible. Retailersthat meet the challenge of consumers’ rising expec-tations will create a virtuous cycle of higher pur-chase and conversion rates, increased loyalty, andgreater advocacy—all of which will greatly enhancethe brand and improve the bottom line.

27

Overall

Information

Product selection

Ease of use

Duration

Price

43

40

36

49

33

54

4

8

6

5

7

5

Average book e-retailer% dissatisfied% completely satisfied

a

P R O F I L E S O F S A T I S F Y I N G S I T E S

Site •Brings together consumers or offline retailers seekingsummary to buy or sell used books, music, movies, or video games

•Offers most items at half their retail price or less•Employs similar model to eBay but uses fixed pricing

rather than an auction format

What Product selectioncustomers •More than 7 million items listed for salelike Ease of use

•Selling process simplified using step-by-step guide and start-up delivery kit

•Links to shopping “bots” and competitors facilitate price comparisonPrice

•Fixed, low prices

What •“I’ll never waste time holding a garage sale again.”customers say

31

35

36

33

31

29

7

8

11

12

13

12

Average travel e-retailer% dissatisfied% completely satisfied

Overall

Information

Product selection

Ease of use

Duration

Price

a

SOURCES: BCG research; literature searches; Harris Interactive e.commercePulse Q2 2000 Database.

a Duration is defined as the time required to complete activities or transactions.

Site •Online offering of the discount airline carriersummary •Main feature: reservation process, plus ability to check

fares, schedules, reward-points status, and airport information

What Ease of usecustomers •Simple, five-step purchase process that can be like completed in less than five minutes

•Clear instructions utilizing screen shots

What •“I just wanted a plane ticket, and that ’s what I got. customers It ’s faster than going to a travel agent, and I know I’m say getting the best price.”

Half (books)

Southwest (travel)

A P P E N D I X

28

36

42

50

40

37

27

5

6

5

7

10

11

Average book e-retailer% dissatisfied% completely satisfied

Overall

Information

Product selection

Ease of use

Duration

Price

a

P R O F I L E S O F S A T I S F Y I N G S I T E S

Site •Pure play that sells a constantly expanding array of summary products ranging from books to cars

What Informationcustomers •Combination of customer and industry reviews, product like description, and photos available for all items

Product selection•Broad and deep product range

Ease of use•Excellent cataloging and search capabilities

What •“Why would I go somewhere else? This site has customers everything I’m looking for.”say

43

49

42

48

41

34

5

6

9

11

11

11

Average clothing e-retailer% dissatisfied% completely satisfied

Overall

Information

Product selection

Ease of use

Duration

Price

a

Site •Online arm of the television shopping channelsummary •Items offered from multiple suppliers across a variety

of categories

What Informationcustomers •Power Search permits searches on multiple dimensions like •Specialized search tools enable personalized recommend-

ations and feature-specific product searchesProduct selection

•Many products not available in traditional stores•Greater product selection than that available from

television channelEase of use

•Product information available at all times versus brief television spots

What •“I could never remember the QVC schedule and missed customers some great products. Now I can go back and get them say another day.”

SOURCES: BCG research; literature searches; Harris Interactive e.commercePulse Q2 2000 Database.

a Duration is defined as the time required to complete activities or transactions.

Amazon (books)

QVC (clothing)

The Boston Consulting Group is a general managementconsulting firm that is a global leader in business strategy.BCG has helped companies in every major industry andmarket achieve a competitive advantage by developing andimplementing unique strategies. Founded in 1963, the firm now operates 48 offices in 32 countries. For furtherinformation, please visit our Web site at www.bcg.com.

The Boston Consulting Group has published a series of

reports on e-commerce. It includes the following:

Vital Signs: The Impact of E-Health on Patients and Physicians

A report on the U.S. market by The Boston Consulting Group, February 2001

Patients, Physicians, and the Internet: Myth, Reality, and Implications

A report by The Boston Consulting Group, January 2001

Mobile Commerce: Winning the On-Air Consumer

A report by The Boston Consulting Group, November 2000

The Business-to-Business Opportunity: Creating Advantage

Through E-Marketplaces

A report by The Boston Consulting Group, October 2000

Online Retailing in Latin America: Beyond the Storefront

A BCG report in partnership with Visa International, October 2000

(Available in English, Spanish, and Portuguese)

Organizing for E-Commerce

A discussion paper by The Boston Consulting Group, April 2000

The State of Online Retailing 3.0

A Shop.org study by The Boston Consulting Group, April 2000

E-Tail of the Tiger: Retail E-Commerce in Asia-Pacific

A BCG NetBizAsia strategy report, March 2000

Winning the Online Consumer: Insights into Online Consumer Behavior

A report by The Boston Consulting Group, March 2000

The Race for Online Riches: E-Retailing in Europe

A report by The Boston Consulting Group, February 2000

For a complete list of BCG publications and information about

how to obtain copies, please visit our Web site at www.bcg.com.

WINNING THE ONLINE CONSUMER 2.0

2001FEBRUARY

Converting Traffic into Profitable Relationships

www.bcg.com EC-R21-2/01

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