The Financial Potential of Sporadic Customers in E-Retailing: Evidence from the Brazilian Home Appliance Sector

The Financial Potential of Sporadic Customers in E-Retailing: Evidence from the Brazilian Home Appliance Sector

Luiz Antonio Joia (Getulio Vargas Foundation, Brazil)
DOI: 10.4018/978-1-60566-096-7.ch004
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Abstract

The scope of this article is to explore the transaction profitability of frequent and sporadic buyers in the e-commerce arena. Evidence in relationship marketing literature stressing the impact of purchase frequency on customer transaction profitability as well as recent academic research challenging this approach and pointing out the importance of sporadic clients is analyzed and presented. A single case study research methodology was chosen for this article due to the exploratory facets associated with the subject and the industry under investigation. In order to gather relevant input to carry out this research, one of the largest retailing groups in Brazil was investigated. Conclusions are drawn showing that greater frequency of purchases does not necessarily translate into increased customer transaction profitability. Implications are presented, enabling practitioners and academics to grasp fully the real value of customers — both frequent and sporadic buyers — in order to develop coherent approaches for dealing with them adequately.
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Introduction

Traditional marketing literature suggests that the benefits accrued from long-term relationships between firms and customers are greater than the returns reaped from short-term relationships. Conceptual evidence on this theory was collated from several researchers who have addressed the importance of retaining customers for corporate profitability (Kenny & Marshall, 2000; Kotler, 1999; McKenna, 1993; Peppers & Rogers, 1997; Reichheld & Sasser, 1990; Reichheld & Teal, 1996; Seybold, 1998).

Notwithstanding the perceived importance of frequent buyers, recent research has challenged this conventional approach, highlighting the fact that companies either fail to comprehend or assess correctly the true value associated with their customers, be they frequent or sporadic purchasers. This behavior may lead firms to make strategic mistakes as well as perpetuate managerial errors, such as high spending for retention of unprofitable customers or failing to perceive the importance of a high-value sporadic consumer (Dowling & Uncles, 1997; Reinartz & Kumar, 2000, 2002, 2003; Schultz & Hayman, 1999).

The correct understanding of how to manage both frequent and sporadic buyers has assumed a truly important dimension, mainly in the e-commerce realm, due to the very high churn rate of customers in this arena. Reichheld and Shefter (2000) point out that up to 50% of consumers abandon an e-retailing company before the third year of their commercial relationship.

The impact of other issues related to the Internet regarding customer defection and transaction profitability is also relevant. The low information asymmetry generated by this technology makes customers far more aware of products and services, readily enabling them to search and locate where the best price can be found, thereby reducing switching costs (Smith et al., 1999). According to Bakos (1997), if the search cost is low enough, buyers will tend to look for prices and products among all available and potential sellers.

The scope of this research is to explore in an empirical manner the transaction profitability derived from sporadic and frequent customers in the home appliance e-commerce sector. The company analyzed is one of the largest retailing groups on the Brazilian market, serving the major and minor appliance industry both through conventional channels and via its Web site. Due to confidentiality issues, the name of the group is omitted from this article.

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