Sunday, March 28, 2010

Online Retailers are Innovating: Customer Service is #1

There's been some talk recently about the online retail ecosystem is finally changing after a decade of staid innovation. Notably, Josh Koppelman has two great blog posts on this subject. Josh makes the point that when you look at the top-15 most trafficked sites on the internet vs. the top-15 most trafficked online retail sites, there has been very little change in the top-15 online retailers whereas the top-15 most trafficked list is dominated by a collection of relatively new names.

I agree with Josh's analysis: up until recently the level of innovation online retail has seen has been no match for what's happened in the broader internet ecosystem. But I think it would be unfair to say that online retailers haven't innovated; it's just that their innovation has taken an old-fashioned form: customer service.

I was reminded of this discussion while thumbing through STELLAService's recent ratings of online retailers in online customer service. STELLAService is an independent agency that ranks the top 150 online retailers across several different dimensions of customer service. I wasn't surprised to see current BVP portfolio company Diapers.com ranked #2 (behind #1 customer service king, Zappos):

#1. Zappos
#2. Diapers.com (current BVP portfolio company)
#5. Amazon
#6. LL Bean
#7. Crutchfield Group
#8. Sears
#9. Best Buy
#10. Apple

Why is it no surprise that the customer service charge is led by two relatively new online retailers?

Established brands have a huge advantage in the online customer acquisition game. For every customer they pay to acquire directly using PPC and other methods, they get a customer essentially for free or at very cheap price compared to less established competitors because customers either search for their brand or recognize their brand in sponsored link results or the natural search results (for more on this, check out my previous post, The Staples 2.0 Effect). When you average in all those free customers, it's a lot easier to make the equation "customer acquisition cost is less than customer life time value" work.

New eTailers don't have this luxury. The only way people are going to find the site initially is if the eTailer pays to acquire them. When each customer needs to be acquired directly, the"customer acquisition cost is less than customer life time value" equation becomes a finely tuned machine. As my colleague Jeremy Levine wrote in his post Penny-at-a-time brands, if it costs the eTailer $100 to acquire a customer, the customer must in turn generate more than $100 of marginal contribution (i.e., gross profit) for the model to "work." No ifs, ands or buts.

Essentially, when you are building a brand, there is no free lunch: every penny spent must result in a positive ROI. To say the least, this is a tall order. And here is the curve ball: it's been my experience that many eTailers don't even make back their acquisition cost with a customer's first purchase. They need the customer to become a repeat buyer for the equation to work.

Neither Zappos nor Diapers.com
has ever had the luxury of brand marketing to build their brand (though now that Zappos has a brand, it is investing in brand marketing). Instead, they've realized that if you give your customers fantastic customer service at every opportunity, they'll not only come back again and again, they'll also tell their friends. And thus, they've built their brands penny by penny, and customer service call by customer service call.

This is why in my opinion, Zappos and Diapers.com are two of the most innovative online retailers around, and it's no surprise they are at the top of STELLAService's list.
That they both figured out how to make above-the-call-of-duty customer service work for their business is great innovation in my book, even if it is a little old-fashioned.

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