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Power to the Little People

E-business gives customers new leverage over corporate giants.
Russ Banham, CFO Magazine
December 1, 2005

If the first decade of E-commerce found companies exploring fresh possibilities, the next will be marked by their growing understanding of a critical new reality: customers are now in control. From their vastly increased ability to compare prices and service levels of various competitors to their willingness to publicize good experiences and slam bad ones to their newfound ability to exert control over product development and design, customers are king. This is true not only in the expanding but still-limited world of E-tail, but across the commercial spectrum, as a company's brand, reputation, and, ultimately, success become nearly indistinguishable from the experience it provides via its Web presence.

This poses a number of challenges for companies. Although it's been 10 years since people first began clicking away on Amazon.com and eBay, understanding how to convert a (human) browser into a paying customer remains largely a mystery. And even if a company improves on that front, does it miss seeing the forest for the trees, given the success that some have had in leveraging the Internet not only to sell more widgets but also to open up new commercial vistas? And what of unhappy customers who take to the blogosphere to vent their frustrations? How much damage can they do, and how should a company respond?

Using E-business to boost the sales of core products remains a priority for many companies, of course. And increasingly, they are finding that to do that they must become more aware of how different the online channel can be in terms of buyer behavior and preferences. JoAnn.com, the E-tailing arm of $1.7 billion arts-and-crafts retailer JoAnn Stores Inc., for example, was surprised to find that of all the promotions it tried to sell more sewing machines online, the one that worked best was a deal in which people who bought two sewing machines saved 10 percent on the sale.

Who buys two sewing machines? Turns out online shoppers do. "We initially thought, why waste a week's worth of sales on this promotion?" says Martin Westreich, CFO of the company's online division, in El Segundo, California. "As it turned out, one person in a sewing community simply called another and said, 'Here's this great deal.' We got a 70 percent increase in conversion rate for consumers who clicked on that promotion."

Its own research had shown the company that Internet buyers tend to wander around arts-and-crafts sites, message boards, and blogs researching products and comparison shopping, and the company wanted to find a way to entice consumers to stay longer on its site and eventually buy something.

But even though Websites can be tweaked quickly, testing various pitches and presentation methods to discover what works best can be costly and time-consuming. Would a photo of one sewing machine invite consumers to explore further, or would they respond more readily to two sewing machines? Maybe three blue sewing machines with "lowest prices" prominently featured? Or a single, very large photo of a gleaming silver sewing machine with the words "free shipping" emblazoned across it? "It's important for us to know what works best, since these are $250-plus items and they are a popular item to buy online," says Westreich.

The problem in traditional AB testing — where one week you test concept A and the next week you test concept B — is that "by the time you get to the data you need to make a decision, you've missed the boat," Westreich explains. So JoAnn.com opted for "multi-variate" testing, in which multiple page designs were tested simultaneously by San Francisco's Offermatica Corp., a hosted service that allows companies to rapidly compare different marketing ideas, from pricing promotions to products, by charting the labyrinth ways in which consumers navigate a Website. Hence the discovery that "buy two and save 10 percent" was the landslide winner.

JoAnn.com learned a simple lesson that other E-tailers are taking to heart: consumers act differently in the online world than they do in regular stores. Companies that continue to market to consumers with hidebound retail concepts stand to lose big. Tower Group estimates global E-tail sales reached $360 billion last year and are rising at double-digit percentage increases annually. Forrester Research predicts online sales in the United States will increase at a very healthy 14 percent annual clip for the next five years, and stresses that online sales are but one facet of an online presence. Forrester analyst Carrie Johnson cites a "huge shift in philosophy" as companies realize that the Web is not just a sales channel but an important way to enhance customer service and increase loyalty. For example, Forrester found that 65 percent of consumers have researched a product online and then purchased it offline, accounting for more than $100 billion in in-store sales.

One Click and They're Gone
"The days of 'push or pull' marketing are over," says Fareena Sultan, associate professor of marketing at the College of Business Administration at Boston-based Northeastern University. "Companies that take an advocacy position, that try to understand what consumers are looking for, create trust. If you're seen as antagonistic, as pushing products consumers don't need, you won't survive. Consumers have other choices. If you make their shopping difficult, one click and they're gone."


Customers don't just vote with their feet; in the online world, they also speak up and spread the word (see "Speak Attack" at the end of this article). Rather than be put off by this, some companies not only facilitate customer commentary, they go to great lengths to encourage it. E-tailer eBags.com, for example, which sells everything from wallets to rolling luggage made by hundreds of manufacturers as well as under its own brand, is building a reputation as a consumer advocate by offering discounts on future products to buyers who post reviews of recent purchases. The company uses this feedback to make product changes — increasing the size of the laptop compartment in a backpack, for example.

Ebags.com doesn't passively wait for customers to post reviews and ideas but actively solicits such input. "Twenty-one days after someone purchases a product on our site, we send that person an E-mail that says, 'Other customers like you would love to get feedback on the product you bought,'" explains Peter Cobb, senior vice president and co-founder of the Denver-based company. Customers are queried on the product's features, price, and whether it matched expectations. Six months later they're asked how the product is holding up. Ebags.com aggregates this data and offers a quick "x percent of consumers would buy this bag again" metric, a 10-point ranking in five different categories and, often, a long appendix of customer reviews.

"We take customers' advice seriously," says eBags.com CFO Mark DeOrio. "If they suggest a product redesign and it makes sense, we make the changes. Fortunately, we don't carry a lot of inventory on our own products so we aren't left with outdated merchandise." As for other manufacturers' products, those companies "routinely log on to the site to see what consumers are saying or to check their overall ratings," DeOrio adds. "We also E-mail the comments to them once a week. I know they have made changes based on what consumers are saying."

By opening itself up to customer criticism and testimonials, eBags creates strong feelings of trust and community, says Jim Nail, principal analyst at Forrester Research. "If consumers perceive you as pushing a product on them to maximize your bottom line, you only reinforce their cynicism and skepticism," Nail adds. "This is all about consumer advocacy." Researchers at the Massachusetts Institute of Technology's E-Business Center have found that the Website characteristics that instill a feeling of trust vary by category: privacy and order fulfillment matter most for information-intense, high-involvement sites such as travel; ease of navigation is key to information sites such as portals, sports, and community sites; advice is critical on sites that sell expensive products such as computers; and brand strength counts for a lot as well, particularly in wooing more-educated consumers. All of that suggests that there is no one-size-fits-all best practice in Web design, but in fact each company must carefully tailor its online presence to reflect its mission, identity, and customer base.

Making Converts
Similarly, understanding the differences between online and in-person shopping has prompted companies to redesign their Web pitches. "More than half of the people who walk into one of our [nearly 1,000] stores typically walk out having purchased something," says JoAnn.com's Westreich. "With catalog shoppers, the conversion rate is about 30 percent. On the Internet, you can be looking at 10 percent. This is a nascent channel where people can quickly navigate what they want to buy and from whom. You can't appeal to them the way you would in a store. You have to learn how they want to buy and then provide products in that way."

Learning how is becoming easier as companies offer more-sophisticated Website analysis software and services. "Companies are able to carefully track the behavior of consumers," explains Patti Freeman Evans, a retail analyst at New York–based Jupiter Research. "They can see the paths these site visitors travel as they browse and place goods into their shopping carts, only to abandon the purchase at the checkout line. This reveals a lot about the 'pain points' on a Website."

New York–based Danskin Inc., which makes women's dance and exercise apparel, hired Ann Arbor, Michigan-based ForeSee Results to analyze its site and survey its customers. The company discovered that while Danskin's effort to drive visitors to the site through paid search and affiliate referral programs was successful, once would-be customers arrived they were turned off by confusing navigation and poor graphics: instead of showing photographs of its products, Danskin had simply upload the line drawings from the catalog it sent to its B2B partners.

Danskin knew its site was, as Eric Nadler, vice president of sales operations and E-commerce, says, "aesthetically unpleasing," but it didn't want to spend a fortune to go state-of-the-art. "We had a very limited budget, and it was very important that what we invested in had immediate ROI," he says. The third-party analysis provided Danskin with the ROI case to upgrade product presentation — it added photos, made clearer navigation a priority, and introduced a "stretch-fit" function so customers could better evaluate products. The company's online business is up 250 percent compared with two years ago.


JoAnn.com took advantage of multi-variate testing to study whether the traditional in-store approach of placing impulse buys near checkout lines had an online equivalent. Turns out it did, but not in the way one might expect. "We tried all kinds of permutations," says chief operating officer Linsly Donnelly. "If we noticed that the cart was full of quilting items, we'd add something in that category at a reduced price, with a click that led to additional information on that product." That went largely nowhere. What did work was offering a generic item that any "crafter" might use, such as scissors, "but only if the buyer was given a simple photo and a 'click to buy,' as opposed to a click for product information."

Building Blocks
Cross-selling is nice, and so is fixing products so that your customers like them better, but why stop there? Lego, which remains many parents' answered prayer in this day of Nintendo and Gameboy addiction, is happily using the online world to offer products it could not offer any other way. The company doesn't simply meet customer requests, it responds to customer designs. Using the "Lego Factory" option at lego.com, customers can download the Lego Digital Designer, special software that lets them design unique products and then order the blocks needed to make them.

"While we have 100 product designers on staff, we like to think we have 100,000 virtual designers out there," says Michael McNally, senior brand relations manager at Lego Systems Inc., the Enfield, Connecticut-based arm of the North American branch of the Danish company. "This encourages people who love the brand to love it even more." Within two weeks of announcing the feature, more than 50,000 North American site visitors had downloaded the software.

Web-based customer design is big in footwear (Vans, Nike, Timberland, and others), apparel, home decor, electronics, and even machine parts. Its inevitable spread will reinforce the perception among customers that they are in the driver's seat. If companies' Web efforts aren't designed to reinforce that view — and capitalize on it — then they may rue the next decade of E-commerce.

Russ Banham is a contributing editor of CFO.

This is the third and final installment in our series on the first decade of E-business. The first two installments ran in the summer and fall 2005 issues of CFO IT.


Speak Attack
In cyberspace, everyone can hear you scream.

When popular blogger Jeff Jarvis turned his attention away from politics and culture and instead devoted a portion of buzzmachine.com to complaining about his experience buying a Dell computer, he touched a nerve — more than 10,000 site visitors checked out that particular post and offered their own criticisms, prompting Dell to begin a program to monitor blogs and forward complaints found in them to its customer-service department.

The Internet has become a vast bully pulpit in which consumers can — and do — voice displeasure. "If they don't like their experience with you," says Fareena Sultan, associate professor of marketing at Boston's Northeastern University, "they'll transmit their feelings to blogs, chat rooms, message boards, and their own sites. In this world, a company's image can go up or down in an instant."

This poses a dilemma for companies: Do you join the fray or stay mum? When Volkswagen of America CEO Len Hunt saw his company getting slammed on vwvortex.com, he began to post his own comments, describing the company's future products and offering other insights to appease disgruntled fans.

Mountain View, California-based Intuit Inc., maker of the popular QuickBooks and TurboTax products, has gone further. "One Friday last year, a forward-minded employee in marketing said there was a lot of blogging going on about QuickBooks," says Paul Rosenfeld, general manager of the Web-hosted QuickBooks Online Edition, "and suggested we start our own blog." It was up and running the following Monday, and today 10 employees from that business unit, everyone from product designers to engineers to Rosenfeld himself, blog on a regular basis (see QBOE.com). The blogs are personal and extend the idea of community in interesting ways: following Hurricane Katrina, for example, it included links to organizations offering various forms of assistance. "We've put a lot of trust in our employees to be unafraid to say what they feel publicly," says Rosenfeld. "I've never once heard someone being told, 'You can't blog this.'"

Why do it? "It creates trust in our community," explains Rosenfeld. "In a very scalable way, we can have personal conversations between one employee and tens of thousands of customers. There is something authentic about the experience."

Other Intuit divisions and product groups are now creating blogs, and while quantifying the merit of blogging is difficult, Rosenfeld notes that it costs virtually nothing other than the blogger's time. More important, Intuit's product designers and engineers often receive important suggestions from consumers regarding product improvement. "If you give consumers what they want, rather than what you think they want," says Rosenfeld, "they remain steadfast and loyal." — R.B.




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