Customer satisfaction propels Amazon

Competition in a free market economy favors the lowest-cost business model as markets mature and price-driven shoppers grow in size. Design a business model that delivers unique benefits, on the other hand, and you must also focus on efficiency. Because customers only pay price premiums for unique benefits, any inefficiency costs come right off your bottom line.

Is it any wonder then that on-line retailing is growing by leaps and bounds, steadily gaining share against in-store retail? E-commerce is far more efficient, something Amazon understood in disrupting the book industry. In addition, on-line sales lower consumers’ indirect costs by saving time and gas money and, during the busy holiday season, avoiding the frustration of fighting crowds.

Nevertheless, efficiency and convenience won’t overcome frustrating on-line shopping experiences. So how successfully are on-line retailers satisfying the increasingly demanding consumer?

Better and better according to ForeSee, a pioneering consultancy in analyzing customer experience across channels and customer touch points. ForeSee just released its 7th E-Retail Satisfaction Index (U.S. Holiday Edition), a survey of 8,500 consumers conducted during the Thanksgiving to Christmas holiday shopping season that shows 2010-2011 satisfaction gains with the top 40 on-line retailers (by sales volume, according to Internet Retailer). Since on-line sales peak in the holiday season, customer satisfaction during the holiday period is a great time to capture how well or poorly on-line retailers are performing.

ForeSee’s data matters as customer satisfaction is a great predictor of consumer spending and brand loyalty. Furthermore, higher customer satisfaction also generates higher financial returns according to the American Customer Satisfaction Index, upon whose methodology the ForeSee survey is based.

At the same time, the drivers of customer satisfaction vary across brands, as they should. According to ForeSee’s President and CEO Larry Freed, “There is no standardized, cookie-cutter approach to e-commerce. The days when there was a checklist of what constitutes the ‘best’ website, business model, or e-commerce solution are well behind us now. Different companies have different kinds of relationships with their customers, different kinds of pre-existing images, different sets of expectations, and so on. Expectations alone can affect satisfaction: people expect lower prices from some companies and better service from others. By understanding the impact of specific aspects of a website on overall satisfaction, e-retailers can save costly investments in upgrades that will not influence satisfaction and behavior and focus their efforts on the changes that are likely to matter most.”

And the winner is…

Amazon wins the competition with the highest customer satisfaction score (88 percent), five points ahead of other leading contenders and up two points from its #1 rating last year. Does this suggest that highly automated service and using data analytics to make customer recommendations will guarantee satisfied customers? Hardly. Netflix’s business model is also automated and includes customer recommendations. But its customer satisfaction plummeted after being tied last year with Amazon for the #1 spot.

In fact, Netflix’s satisfaction dropped seven points this year in the survey results to 79 percent, the average for the 40 e-retailers as a set. Netflix’ price increase and a decision (since overturned) to split its on-line business apart from its DVD-rentals business (thereby forcing many customers to hold two memberships) angered many customers. The anger served to lower customer satisfaction (by 8 percent), a dangerous situation as Netflix faces a growing set of competitors. According to the ForeSee survey, the drop in satisfaction also lowered Netflix customers’ likelihood of using Netflix for similar purchases in the future (down 10 percent), recommend Netflix (down 11 percent) or return to the Netflix website (down 5 percent).

With Amazon and Netflix now in the same market space for on-line movie and TV show viewing, I know which stock I’d bet upon. In an e-commerce war, customer satisfaction is like the highest hill on the battleground, conferring welcomed advantages in the battles ahead.

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. She served as chief economist for former Wisconsin Republican Gov. Lee Dreyfus. Plantes provides expertise in business model innovation, strategic leadership and smart economic policies.

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