RetailLab Interactive E-Commerce 2.0 – New

RetailLab
Branchenbezogene Forschung
Interactive E-Commerce 2.0 –
New Applications for
Customer Retention Management
Dirk Möhlenbruch, Steffen Dölling and Falk Ritschel
Conomic Marketing & Strategy Consultants
Weinbergweg 23, 06120 Halle an der Saale
Telefon: +49 345. 55 59 652
Telefax: +49 345. 55 59 653
E-Mail: [email protected]
1
Introduction
1
2
Requirements for customer retention management
2
3
Web 2.0 applications in e-commerce
3
4
Interactive customer retention management
4
5
Conclusion
6
References
7
1 Introduction
The importance of customer retention rose distinctively within the last decade because of the amplification of global competition, ascending dynamics of markets and the change of consumer behavior
in many industries (Homburg, Bruhn 2005, p. 5; Bruhn 2001, p. 2). There is a large consensus in the
scientific literature on customer retention being able to provide a considerable contribution to the
economic success of a business operation. Customer retention achieves its contribution through the
generation of repurchases, cross-buying, recommendations and the improvement of tolerance to increased prices (Bruhn 2001, p. 104; Diller, Müllner 1998, p. 1221). Several studies document that the
acquisition of new customers is ten times as expensive as the retention of existing customers (Stolpmann 2000, p. 18; Gummesson 1999, p. 183).
The customer is the central authority in the processes of relationship marketing. He has a strong position in the market, which is linked to a better negotiating position opposite the companies. The market
power of customers is particularly strong in the internet. The online market is characterized by high
offer transparency, a comprehensive level of information and a decrease of changing barriers for customers (Förster, Kreuz 2002, p. 4; Diller 2001, p. 71). The amount of information provided by vendors
is increasing at a much faster pace than the volume the customer demands (Lihotzky 2003, p. 3). The
resulting cognitive overload calls for more individualization of the information (Kroeber-Riel, Weinberg
2003, p. 90). The combination of the rising market power of customers, the cost benefits of customer
retention and the necessity of individualized information search capabilities create an important need
for customer retention management. It presents a plethora of possible solutions through the personalization of interaction and buying processes.
The instruments of web 2.0, intensively discussed in recent times, make arranging interactive business
relationships possible for companies. The topicality and the multifaceted possibilities, however, did not
allow for a systematization of the areas of application in the field of customer retention management
so far (O’Reilly 2005b). The applications of web 2.0 offer new methods for the design of electronic
business relationships. Hence their classification within the specific stages of customer retention management is of growing importance for the economic success of e-commerce.
The objective of the following research paper is to analyze and systematize the applications of web
2.0 within the context of customer retention management in e-commerce considering its main focus
functionality. To reach that goal, the interfaces between an interactive design of customer relationships
— through the instruments of web 2.0 — and the determinants of customer retention management
will be displayed and evaluated to document the possible influence of this combination on customer
retention.
1
2 Requirements for customer retention management
Customer relationships and their stabilization, as well as the constitution and utilization of current
and prospective potentials of these relations, hold a high economic value in many companies. The
importance of customer retention management for the financial success of a company is undisputed.
Seen as managerial objectives, links to the customers can be viewed as long-term investments (Piller,
Schaller 2002, p. 442). Customer relationships can be differentiated into dependence and solidarity
(Bruhn 2002, p. 108; Bliemel, Eggert 1998, p. 39). The following comments focus on voluntary customer retention, which centers attention on the development of preparations for increasing satisfaction
and reliance. The management of customer retention comprises the analysis, planning, enforcement
and controlling of all arrangements concerning the actual customer. The goal is maintaining the business relationship through a sequence of transactions (Homburg, Bruhn 2005, p. 8).
Figure 1 shows the functional chain of customer retention with its three main phases, its determinants
and the particular focus of each activity.
Figure 1: Functional chain of customer retention
Source: Adapted from Homburg, Bruhn 2005, p. 10.
The first segment of the success chain comprises the state of satisfaction. This phase is characterized
by the result of a comparison and evaluation process (Homburg, Koschate 2003, p. 621). The evaluation of the targeted expectations against the actual perceived achievement (Confirmation-/Disconfirmation-Paradigm) results in an individual confidence level (Betz, Krafft 2002, p. 3). A pool of information
forms the basis for the design of expectations in this concept. The given information will determine the
development of demands and, in turn, the building of customer satisfaction (Kroeber-Riel, Weinberg
2003, p. 229; Bauer et al. 1999, p. 285). For the given reasons, the constitution of customer satisfaction
requires a focus on information.
The second segment of the success chain reflects customer loyalty with its determinants: confidence
and acceptance (Homburg, Bruhn 2005, p. 10). Confidence is a future-oriented dimension. It is able to
reduce the uncontrollable complexity and risk involved in the decision making process (Piller, Schaller
2002, p. 443). Additionally, confidence determines the specific expectations for a prospective action
(Kroeber-Riel, Weinberg 2003, p. 423). The development of confidence is dominated by the reliability
of information and events (Bauer et al. 1999, p. 294). The acceptance factor can be seen as consenting
value judgment (Wiedmann, Frenzel, p. 102; Kroeber-Riel, Weinberg 2003, p. 104). The resulting wil-
2
lingness of the customer to excuse minor mistakes of the company and to defend the vendor against
recriminations from a third party is based on the exchange from both parties’ relationship (Bauer et
al. 1999, p. 295). The addressed factors — confidence and acceptance — evolve through the communication of both parties. The goal of the second segment should be to integrate dialog supporting
activities in a companies customer retention management. Thus the second stage can be determined
consequently through the focus on interaction.
Customer retention is achieved in the third phase of the functional chain if the determinants of repurchase, cross-buying, recommendation and/or decreased price sensitivity are in place (Homburg,
Bruhn 2005, p. 10). The theory of transaction costs can be used for the analysis of customer retention. It indicates that the inefficiencies of a market cause transaction costs (Williamson 1991, p. 272).
Repurchases and cross-buying are able to reduce this transaction costs (Wirtz, Lihotzky 2005, p. 145;
Bruhn 2001, p. 28) whereas recommendations are based on the exchange of information. For this
reason, all the displayed determinants that are part of this stage are characterized by material and
immaterial exchange processes and therefore require a focus on transactions.
3 Web 2.0 applications in e-commerce
The internet and the electronic realization of business processes through the medium have obtained
more and more economic relevance in the past few years for an increasing number of vendors (Lihotzky 2003, p. 24) After the overreaching expectations in the 1990s and the subsequent reassessment of
opportunities and potentials, the development of new business models in e-commerce is starting at
present.
There are growth possibilities in the position of e-commerce in today’s economic process. Vendors are
able to decrease transaction costs and actively involve customers in the business processes through the
personalized interaction of the execution of transactions over the World Wide Web (Shim et al. 2000,
p. 9).
The instrument of demand management of classic retailers can be used for the identification of relevant
e-commerce instruments. For example, consider a retail company which is divided into the areas of
product, personnel, place, promotion, price and sales room (Müller-Hagedorn 2005, p. 8). The instruments personnel, place and sales room are less relevant because in an electronic business no physical
presence is necessary. The Front End, the interface to the customer demands, is more important instead
(Wilke et al. 2005, p. 106; Wilke 2002, p. 284).
The relevant applications of web 2.0 are a result of the requirements which derive from the definition
of O’Reilly (O’Reilly 2005a, Graham 2005). It is possible to assign them to the different instruments of
e-commerce according to their main focus (Figure 2). The most important applications will be displayed
within the specific scopes and the classification according to their analyzed functional main tasks. 1
E-commerce will be understood in this paper as the electronic initiation, negotiation and completion of transactions between economic entities, especially when performed through the use of the internet (Bidgoli 2002, p. 5;
Laudon, Traver 2002, p. 7; Wirtz 2002, p. 57).
2
There is no classification available for applications such as social news, social bookmarking and internet driven
desktop applications because their main focus does not correspond with a specific instrument of e-commerce.
Hence they will not be contemplated in this article.
3
Figure 2: Applications of web 2.0 assigned to the instruments of e-commerce
Source: Möhlenbruch, Dölling, Ritschel 2007, p. 205.
Wikis, RSS-Feeds, Video- and Podcasts, as well as Social Networks, have a special impact on the
instrument product line in e-commerce applications. They make it possible to use customer driven
content to generate value-added-services for the customers (Groß, Hülsbusch 2004, p. 44), gain information about desired products (Förster, Kreuz 2002, p. 191) and assemble user profiles with specific
preferences (Faltin 2006, p. 12).
The instrument price is supported by Social Networks and Social Shopping. They allow the vendors
to collect information regarding price decisions and to influence and realize group buying processes
(Komus 2006, p. 37). Promotion is emphasized in the majority of internet applications and can be assisted by different web 2.0 instruments. RSS-Feeds, Pod- and Videocasts, Social Networks and Blogs
offer possibilities to enhance the communication between e-commerce-vendors and customers. The
requirements of permission- and one-to-one-marketing can be met (Wiedmann, Langner 2004, p. 207)
and individual communication is possible (Faltin 2006, p. 12; Schütte, Diederich 2006, p. 27, Hippner
2006, p. 15). The front end as the direct interface to the customer can be mainly supported by Tagging
and Mashups. These applications either enable a direct arrangement of the front end (Bächle 2006, p.
123) or establish new ways for business models in e-commerce (Göhring et al. 2006, p. 62).
4 Interactive Customer Retention Management
The findings of the precedent chapters feature a reasonable systematization of the applications of web
2.0 within the context of customer retention management. The main focus at the stage of customer
satisfaction is information, which is supported mainly through Wikis, RSS-Feeds, Pod- and Videocasts.
Wikis are able to generate user driven information. RSS-Feeds deliver content on request from the
user and record his preferences. Additionally, RSS-Feeds as well as Video- and Podcasts, support the
increase of customer satisfaction within the promotion because companies can use them as an effective channel for push communication. That can be used to effect a positive change of attitude in the
customer. Tagging is another information application drawn as a component within the front end of ecommerce solutions. It allows e-commerce vendors to establish a customer-driven search and hence
to achieve significantly higher transparency and better quality perception from the customers.
The second stage of the success chain of customer retention is customer loyalty, with its major focus
being interaction, which can be supported by numerous instruments from web 2.0. Social Networks,
for example, are interaction oriented applications which are able to enhance the loyalty of customers
(Förster, Kreuz 2002, p. 185). Passive monitoring of discussion forums will allow the vendors to get valuable information about preferences and sentiments which might be useful for product line design or
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pricing strategies. The resulting precise activities are able to improve the confidence and acceptance of
customers and enable an active impact on these communities, which in turn allows creates a positive
image for the company and the offered products. The risk of a reversion of possible positive effects is,
however, high, because the recognition of an active influence leads to the loss of authenticity in the
view of customer (Göhring et al. 2006, p. 64). Beyond this, Social Shopping establishes pricing potential through the interaction of users, which is able to increase the loyalty of the customers. In particular,
this arises during a user driven valuation of prices, which contains direct statements about willingness
to pay. A purposeful utilization of this user driven information creates confidence and acceptance. The
integration of the interactive components of Weblogs allows for active communication regarding company related content, which increases customer loyalty. This is even more applicable in Mashups as a
combination of services, which in some specifications support interaction, increase the acceptance of
websites and can affect customer loyalty positively.
A direct means of customer retention can be accomplished with Social Shopping, which focuses on
the execution of transactions. The tendency to repurchase and cross-buy is increasing because of the
collaborative buying processes taking place. Direct recommendations are much easier for the users to
trust. Similar cognitions apply for particular types of Mashups. Value added services for the customer
might occur here for example, if the vendor offers relevant information for the successful determination of the buying process (Göhring, et al. 2006, p. 62). It is possible to ascertain that all of the displayed
applications of web 2.0 are able to affect customer retention because of their influence on satisfaction
and loyalty. The characteristics of the success chain as a process model of customer retention management also show the effects of the displayed applications of web 2.0.
Figure 3 documents the possible applications of web 2.0 structured with the instruments of e-commerce as well as in connection to the different stages of the success chain of customer retention.
Figure 3: Applications of web 2.0 in customer retention management of e-commerce
Source: Möhlenbruch, Dölling, Ritschel 2007, p. 210.
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The applications of web 2.0 have a direct impact on the three main phases of the success chain of customer retention. The integrated consideration of the applications is necessary because the support of
the functional chain in every stage achieves an improvement in customer retention management (Garcia, Rennhak 2006, p. 4). The consistent adoption of the instruments of web 2.0 within the framework
of customer retention management promises direct positive effects on the relationship between companies and customers. The results of this paper show that interactive customer retention management
is a meaningful complement for existing instruments of electronic commerce.
5 Conclusion
Companies that want to use web 2.0 applications successfully within their customer retention strategies have to deal with the competitive conditions of web 2.0 and should conduct a systematic
integration in their specific customer retention management. The approaches shown will penetrate
the market if they are able to prove their economic worth by generating value through the increased involvement of customers. The adoption of this new internet applications promises, besides the
reachable emotional commitment, the possibility to effectively differentiate from the competition, since the customer will most likely use the specific interactive instruments in a limited way. For this reason, companies have to answer the question of how to generate the critical mass of users which will
enable them to produce an advantage in competition through the development of entry barriers. There
should be further research to find the right incentives for getting customers to enhance their participation, which could present an interesting intersection with the field of customer integration.
The displayed conclusions create a demand for advanced research. The empirical verification of coherences between the particular focuses of customer retention management and the different applications of web 2.0 will be of particular interest. Furthermore, the potential of the visualized applications
within specific e-commerce instruments could be firmed up and validated empirically. The possibilities
of use of web 2.0 present a reasonable supplement to existing instruments of customer retention
in electronic commerce. Until now it was questionable whether e-commerce vendors were able to
persuade their customers of satisfactory participation during the initiation and processing of business
transactions.
Prof. Dr. Dirk Möhlenbruch is the head of chair for Marketing and Retailing at the Martin-Luther-University Halle-Wittenberg and member of
the scientific advisory board of Conomic - Marketing & Strategy Consultants. Dipl. Wirt.-Inf. Falk Ritschel and Dipl.-Kfm. Steffen Dölling are
Research Assistants and PhD-Students at the chair of Marketing and Retailing.
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