There’s been a lot of talk in ecommerce circles about what the next generation of Internet retailing will look like. The trendy predictions you’ll hear involve things like “social shopping” (customer reviews, Wikis, user generated content, etc), and impressive user interfaces that weave together AJAX, video, and 360 degree product reviews. These are all worthwhile endeavors that will increase conversion rate for merchants who implement them, but eTail 2.0 isn’t just about conversion rate, and therein lies the secret to the next generation of successful online merchants. eTail 2.0, simply put, is customer retention.

eTail 1.0 Circa 2001 – If You Build It, They Will Buy
To date, the Internet has enabled easy growth via customer acquisition (and it may turn out, too easy). By simply paying the right cost per click, or buying the right banner ad, or even having the right domain name, your ecommerce store can show up front in center on Google, MSN, Yahoo, Shopping.com, and so on. Consumers, it seems, have been easily wowed by a nicely designed site, tax-free prices, and the increased selection that online stores offer. As a result, thousands of companies have created incredibly successful online retail businesses.

But lurking beneath this success is an ugly secret – many etailers do not have the means (and in some cases, the desire) to provide even a modicum of customer service. After all, when the concept of selling online first started, the idea was that ecommerce would eschew traditional offline costs (inventory, customer service, a brick and mortar store, etc) and pass the savings onto the customer.

Problem is, the early days of online shopping ended a few years ago. Today, consumers expect that an order placed online will come with the same level of service they would get from their local retailer. This creates quite a problem for etailers who have based their model on the ‘low prices, no infrastructure’ approach. These etailers – having refined their marketing strategy and user experience – are still adept at acquiring new customers. But these new customers now have different expectations than the early adopter customers of 2003. The customers of 2008 expect the same level of service and infrastructure online as they expect offline.

eTail 1.0 Circa 2008 – Death By A Thousand Cuts
The collision between eTail 1.0 retailers and eTail 2.0 customers is often not pretty. It often involves angry phone calls, complaints to the Better Business Bureau, negative feedback on shopping engines, multiple recitations of the bad shopping story to friends and relatives, and of course a vow never to shop at the specific store again.

This is a problem for etailers for three reasons. First, a pattern of bad customer service results in “negative customer retention” – instead of gaining new customers for life, the negative reviews drive away the specific customer at issue and any potential customer who hears/reads the tail of bad service. Second, bad customer service results in negative ratings on comparison shopping engines and anywhere else a consumer can post a review. These negative ratings can and are used by shopping engines, eBay, Amazon, and Google to ban bad service advertisers from advertising in the future, thereby cutting off any future growth.

Third – and perhaps most importantly – is that a lack of customer retention ultimately leads to non-competitive back-end economics. As I wrote in a prior post:

If you can get the customer to return five times and spend $100 each time, that’s $500 more you could spend profitably acquiring this customer. Moreover, it turns out that repeat customers tend to spend more than new customers, require less customer service, and are more likely to recommend your business to others. LTV can be a real cash cow for businesses that can crack it.

Inevitably, bad customer service catches up to an etailer. Publishers ban you from advertising, consumers spread the bad word to other consumers, and competitors out-spend you with superior back-end economics.

eTail 2.0 – Price, Select, Convenience AND Service
The emerging kings of ecommerce are companies that get customer service. They understand that in a Google Quality Score world, your customer acquisition channels can disappear overnight, and that the most valuable advertising comes from your brand advocates or net promoters.

I recently took a tour of Zappos.com headquarters in Las Vegas. The tour is open to anyone – indeed, you could probably be a direct competitor, identify yourself as such, and be welcomed with open arms. I think this tour should probably be a required activity for anyone involved in ecommerce, simply because the overall mantra you walk away with is “service, service, service.” Here’s a few examples of what I mean:

  • The Zappos motto is proudly displayed on the front door of the building: “We’re a service company that happens to sell shoes.”
  • Each and every employee of Zappos – regardless of position – must spend four weeks in customer fulfillment and customer service.
  • It takes an average of six seconds for any call into Zappos to be answered – 24 hours a day.
  • You can call Zappos and ask them to order a pizza for you . . . and they’ll do it!
  • In the front lobby, there’s a library of more than 100 business best-sellers – free to whoever wants to take them. All are focused on customer service.
  • If a customer orders a shoe on Zappos and it is out of stock, Zappos will order it from another retailer and get it delivered.
  • The Zappos fulfillment center in Kentucky is right next to UPS, resulting in rapid delivery of any product ordered.

Zappos doesn’t claim to be the cheapest place to order shoes online, but customers come back again and again. The Zappos Web site doesn’t have all the Web 2.0 bells and whistles, but consumers buy over a billion dollars of products annually.

Think of two of the biggest retailers online – Zappos and Amazon. What’s the one thing people say about these two companies again and again – “The package arrived much earlier than I thought.” Underpromise and overdeliver.

In 1999, you can differentiate etailers based on selection, price, or information. Today, these differentiations are disappearing quickly. Prices are usually no more than 5% different between retailers, selection is virtually identical, and Web design and technology have improved to the point that the difference between an A+ and an A- Web design aren’t that great.

In short, the process of buying online is becoming commoditized. The only differentiator left is customer service and fulfillment. Build a company that converts customer acquisitions into long term business through service and fulfillment and you will survive and grow. Build a company that acquires customers without regard for orders #2 through 100 from that customer, and you face extinction.

A Final Note from Zappos

I’ll end this post by quoting at length from the Zappos “About Us” page on their site. If you are a retailer and you read Zappos‘ credo, ask yourself how your business compares. If you can’t hold a candle to their customer service approach, what do you think will happen when Zappos expands beyond shoes to your vertical? If you aren’t scared, you aren’t paying attention.

So here is our vision:

  • One day, 30% of all retail transactions in the US will be online.
  • People will buy from the company with the best service and the best selection.
  • Zappos will be that company.

We believe that the speed at which a customer receives an online purchase plays a very important role in how that customer thinks about shopping online again in the future, so at Zappos, we have put a lot of focus on making sure the shoes get delivered to our customers as quickly as possible. In order to do that, we warehouse everything that we sell, and unlike most other online retailers, we don’t make an item available for sale unless it is physically present in our warehouse.

Our goal is to position Zappos as the online service leader. If we can get customers to associate the Zappos brand with the absolute best service, then we can expand into other product categories beyond shoes. And, we’re doing just that.

Internally, we have a saying:
We are a service company that happens to sell ________.

  • shoes
  • and handbags
  • and clothing
  • and eyewear
  • and watches
  • and accessories
  • (and eventually anything and everything)

We view shoes as just our foundation. We believe that as long as we are known for our service, then expanding into almost any category is possible.

So a little bit of information about shoes: It’s a $40 billion market in the US, and in 1999, $2 billion of that was sold by mail order catalogs. In surveying our first customers in 1999, we found that only 1 out of 3 customers had purchased shoes by mail order before, implying that the e-commerce market would be much bigger than $2 billion.

In brick and mortar stores, about 1 in 3 sales are lost due to the customer’s size not being in stock. Brick and mortar stores are limited in how much inventory they can carry, and therefore they are limited in the number of brands, number of styles per brand, and number of sizes and widths they can carry.

Zappos.com currently stocks more than 3 million shoes, handbags, clothing items and accessories from over 1,100 brands. We offer the absolute best selection of shoes available anywhere, but much more important to us is offering the absolute best service.

We staff our call center 24/7, and currently have a staff of over 1,300 people. The vast majority of our employees work on the front lines taking care of our customers or shipping shoes out of our warehouse. We believe that the most important key to our success will be our service-oriented culture, and we spend a lot of time and effort working on ways to constantly improve our culture.

As one example, every new employee that we hire in our corporate office is required to go through 4 weeks of Customer Loyalty training (answering phones in our call center) before starting the actual job that he/she was actually hired for. To us, customer service isn’t just a department — it is the entire company.

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David Rodnitzky
David Rodnitzky is founder and CEO of 3Q Digital (formerly PPC Associates), a position he has held since the Company's inception in 2008. Prior to 3Q Digital, he held senior marketing roles at several Internet companies, including Rentals.com (2000-2001), FindLaw (2001-2004), Adteractive (2004-2006), and Mercantila (2007-2008). David currently serves on advisory boards for several companies, including Marin Software, MediaBoost, Mediacause, and a stealth travel start-up. David is a regular speaker at major digital marketing conferences and has contributed to numerous influential publications, including Venture Capital Journal, CNN Radio, Newsweek, Advertising Age, and NPR's Marketplace. David has a B.A. with honors from the University of Chicago and a J.D. with honors from the University of Iowa. In his spare time, David enjoys salmon fishing, hiking, spending time with his family, and watching the Iowa Hawkeyes, not necessarily in that order.