Loyalty is defined as the repeated satisfaction of a customer with purchases of products from a specific firm or brand. Firms have been developing customer loyalty programs because it is generally less expensive for firms to retain existing customers than to attract new ones (Reichheld & Schefter, 2000). Although the correlation between customer loyalty and long-run firm profitability is under discussion, there is a consensus on positive effects of customer loyalty programs on firm sales (Reinartz & Kumar, 2002). Loyalty programs are also attractive for customers since they receive special offers or discounts. The notion of loyalty on the Internet, coined as electronic loyalty (e-loyalty), is a relatively new concept. However, because of their potential to increase sales and reduce online customer retention costs, e-loyalty programs have received much attention from both businesses and academic researchers. In what follows, we first summarize major theoretical results and empirical evidence on customer loyalty in the literature. We then analyze different types of popular e-loyalty programs on the Internet.
It is found that firms can create loyal customers in traditional markets by exploiting or artificially generating the so-called consumer switching costs (Beggs & Klemperer, 1992; Chen, 1997; Kim, Shi & Srinivasan, 2001; Klemperer, 1987a; Klemperer, 1987b). Switching costs may arise from a variety of factors such as the nature of the product (learning and adaptation costs), consumer characteristics (risk-aversion), or deliberate strategies followed by firms (frequent-usage points or cash-back rewards). Klemperer (1987a) suggests that the noncooperative equilibrium in an oligopoly with switching costs may be the same as the collusive outcome in an otherwise identical market without switching costs. Padilla (1992) finds that switching costs make overall competition less severe and may lead to local monopoly power. Beggs and Klemperer (1992) study the evolution of duopolists’ prices and market shares in an infinite-period market with consumer switching costs. They show that firms’ prices and profits are higher if switching costs are present in the market. In a recent paper by Kim, Shi, and Srinivasan (2004), loyalty programs are examined in the context of capacity management. They find that loyalty programs enable firms to better adjust their available capacities in response to the actual level of market demand.
The concept of e-loyalty may differ from the conventional notion of loyalty in traditional markets. Among the factors that play important roles in building e-loyalty are the prior experiences of customers with an e-commerce website, information content of the Website, the time it takes to shop, the ease and security of online transactions, and the price advantage (Devaraj, Fan, & Kohli, 2003). It is easier for e-commerce companies to track customer behavior through the use of online surveillance technologies and customize products and services for individual needs. However, reinforcing e-loyalty appears to be vital due to consumer wariness about electronic shopping, which leads to high customer acquisition costs and low retention rates.
Recent empirical research indeed supports the existence of e-loyalty in e-commerce markets. For example, by analyzing data from online price comparison software, called “shopbots”, Smith and Brynjolfsson (2001) find that customers are willing to pay premium prices for books from online retailers they purchased before. Chen and Hitt (2002) also find parallel results by studying online brokerage industry. Johnson, Moe, Fader, Bellman, and Lohse (2004) report that almost 70% of online CD and book shoppers are loyal to only one site and consumers tend to search fewer sites as they become more experienced with online shopping. Using a survey data, Devaraj, Fan & Kohli (2003) find that customer loyalty toward online stores is significantly higher than their loyalty toward conventional brick-and-mortar stores. They argue that the state-of-the-art Web technologies implemented by e-commerce firms are among the major factors reinforcing e-loyalty more than their traditional counterparts.
Key Terms in this Chapter
Switching Cost: The broad term used for the cost of inconvenience imposed on a customer due to switching from a product, service, brand, or a firm to another. Since switching costs are more psychological and less financial, it is difficult to quantify them. There is a strong relationship between switching costs and customer loyalty. If the level of the switching cost of a customer for a specific brand is higher than a threshold, then the customer does not have an incentive to switch to another brand, and hence remains loyal.
Data Warehouse: A large database that collects an organization’s transactional and customer-related data in a single logical repository for analysis and managerial decision making purposes. The data can originate from many operational areas of the organization, such as Website transaction logs of customers, online shopping carts, point-of-sale terminals in stores, warehouse inventory, and field sales reports. Through the use of data mining tools, complex algorithms and filtering techniques on the data collected in a data warehouse, organizations can track their customers’ behavior online, and identify their needs and common problems. Data warehouses can provide managers with a more complete and accurate profile of their customers, which can be used to tailor product and service offerings in line with customer expectations.
Electronic Data Interchange (EDI): A computer-to-computer communications standard for exchanging digital business documents among firms, such as invoices, purchase orders, price lists, and shipping bills. EDI standards were first developed in late 1970’s and have been evolved since then. The main goal of EDI is to reduce errors, delays, and cost of document exchanges by digitizing and standardizing documents. EDI messages are organized with distinct fields for each of the important pieces of information in a commercial transaction such as date, product specifications, amount, addresses, and names. EDI has become an important industrial network technology standard by enabling faster communications among a small set of strategic partners and establishing long-term relationships. The technical infrastructure of EDI systems has significantly evolved from mainframes to personal computers and wireless devices. Moreover, the telecommunications environment is changing from private dedicated networks to the Internet.
Online Surveillance Technologies: A generic name for a technology that can track and monitor online activities of visitors to a specific website through the use of special software. Surveillance technologies can be used either with or without the consent of visitors, and they range from Internet Protocol (IP) tracking utilities to the analysis of server logs and network monitoring. The question of whether the implementation of surveillance technologies by e-commerce companies to better serve visitors is a security or privacy issue is still under discussion.
Business-to-Consumer (B2C) E-Commerce: A type of electronic commerce in which products and services are marketed and sold by a firm to individual consumers through a Web-based application. Consumers can check product prices and specifications on the firm’s Website, and they can place their orders online without visiting a store or consulting to a sales representative. There are different types of business models in the B2C e-commerce, including portals, online retailers, content providers, transaction brokers, and service providers. Among the well-known B2C companies are Amazon.com, Dell.com, Apple.com, Expedia.com, and Etrade.com.
Shopbot: Short for “shopping robot”, an intelligent software agent that can automatically search a large number of online stores for a specific product. Shopbots enable consumers to make a comparison shopping by displaying on a single page the prices and features of a product offered by different vendors. Among the well-known e-commerce companies utilizing shopbots are www.bizrate.com, www.mysimon.com, and www.pricegrabber.com. As the cost of searching on the Internet increases, the value of shopbots is expected to increase in the near future.
Electronic Loyalty (E-Loyalty): Repeated satisfaction of a customer with purchases of products or services from a specific e-commerce Website. The notion of e-loyalty extends the traditional definition of brand loyalty concept to online consumer behavior. It is described as an evolution from the traditional marketer-controlled concept towards a consumer-controlled and technology-facilitated concept. Among the factors creating e-loyalty are quality customer support, on-time delivery, comprehensive product information, reasonable shipping and handling prices, and clear and trustworthy online privacy policies. There are several metrics used to measure the level of e-loyalty for a specific e-commerce site such as the frequency of single user visits, and percentage of customers who return to the site to make additional purchases in a specific period of time.