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  • 1. AMERICAN CUSTOMER SATISFACTION INDEX ANNUAL E-COMMERCE REPORT FEBRUARY 15, 2005 Commentary by Larry Freed President and CEO, ForeSee Results
  • 2. E-COMMERCE: CUSTOMER SATISFACTION SLIPPING AS INDUSTRY MATURES After three years of strong, sustained satisfaction increases, customer satisfaction with e-commerce has declined. The fourth quarter 2004 American Customer Satisfaction Index (ACSI) E-Commerce Report shows that satisfaction is slipping with the e-commerce industry, led by marked decreases in satisfaction with some industry heavyweights. The fourth quarter 2004 e-commerce aggregate customer satisfaction score is 78.6, a 2.7% decline from fourth quarter 2003. Despite the drop in satisfaction, e-commerce still boasts a strong score relative to the aggregate ACSI score of 73.6, but this year, the ACSI aggregate is closing the gap. Ratings are calculated based on the ACSI’s 100-point scale. Each of the measured e-commerce categories (online travel, retail, auctions and brokerage) also experienced dips in satisfaction from last year. With a score that is 4.8% lower than last year’s, e-retail has the dubious distinction of having the largest satisfaction decrease among the four e-commerce categories. The fact that customers aren’t as satisfied as they used to be with e-commerce is not a complete surprise, considering the maturation of the industry. Use of the web channel to buy or sell products, book travel and conduct financial transactions has become a matter of course for many Americans. E-commerce sites, like websites in general, must continue to maintain customer satisfaction in a world where customer’s standards continue to rise. Sites that remain stagnant, or are unable to differentiate themselves from the competition, eventually see customer satisfaction erode. This year sees the continuation of a trend toward diversification for several key e-commerce sites measured by the ACSI. Many sites, including industry leaders like Amazon and eBay, have moved away from their core focus and expanded their scope of products and services offered. By doing so, these organizations have changed their business models and diluted their brands, leading to declines in customer satisfaction scores. . Category Q4 Scores % Change 2000 2001 2002 2003 2004 (2004 vs 2003) ACSI Aggregate 72.6 72.6 72.9 74.0 73.6 0.4% Retail Aggregate Score 72.9 74.8 74.6 75.0 72.6 -3.2% Commercial Banking For More Information Aggregate Score 70 72 74 75 75 0% 1.800.621.2850 E-Commerce 73.2 74.3 77.6 80.8 78.6 -2.7% E-Retail 78 77 83 84 80 -4.8% Online Auctions 72 74 77 78 77 -1.3% Online Travel N/A N/A 77 77 76 -1.3% Online Brokerage 72 69 73 76 75 -1.3% 2
  • 3. ONLINE RETAIL: NOT KEEPING PACE WITH THE NEEDS OF CUSTOMERS E-retail experienced a significant drop in year-over-year customer satisfaction, despite the estimated 25-30% growth in online sales this past holiday season. With an aggregate score of 80, customer satisfaction with the e-retail category is down 4.8% since last year. The decline in satisfaction can be partly attributed to a sharp drop in customer satisfaction for Amazon, which fell from 88 in fourth quarter 2003 to a still strong 84 in fourth quarter 2004. However, 80 is still a solid aggregate score for the category, evidence that e-retail is still doing a very good job at satisfying customers; and a better job of satisfying customers than retail overall, which has a current ACSI customer satisfaction score of 72.6. % Change E-Retail Scores 2000 2001 2002 2003 2004 (2004 vs 2003) E-Retail 78 77 83 84 80 -4.8% inc. 77 82 87 86 87 1.2%, Inc. 84 84 88 88 84 -4.5% BUY.COM Inc. 78 78 80 80 80 0.0% 1-800-FLOWERS.COM, Inc. 69 76 78 76 79 3.9% All Others 77 75 82 83 79 -4.8% There are two primary explanations for the decrease in e-retail customer satisfaction. First, e-retail has gone from novelty to mainstream, meaning that customers have a preconceived idea of how their online purchase experience should be. The success of e-retail over the past several years has raised the standard for a good online experience. Today’s sophisticated online customers frequently use more than one channel for shopping and purchase, and want a shopping experience that rivals, if not surpasses, what they’d find in a “bricks and mortar” store with the convenience and accessibility of an e-retail store. A second factor in the decline of customer satisfaction with e-retail is the diversification of successful leaders in the category. Some sites are experiencing “growing pains” as they move beyond their core competencies and into new product and service categories. Bigger isn’t always better, from a customer’s viewpoint. Amazon, ranked an 84, with a 4.5% drop in its customer satisfaction score this year, is a prime example of this phenomenon. This online giant built its business, brand and a strong customer following by doing one thing—selling books, music and videos online—and doing it well. Books and music were well suited to selling online since they required a minimum of customer For More Information service support—a book from Amazon was the same as a book from any other retailer—and 1.800.621.2850 Amazon could store vast inventories of titles in warehouses instead of using expensive retail space. Moreover, customers could count on consistent quality from Amazon products. This is an effective model for the web and one that offers great opportunity to maximize the selling organization’s efficiency. 3
  • 4. Today, Amazon has moved well beyond books and music and has morphed into an online shopping mall, selling everything from garden appliances and apparel to electronics and used books. Brand dilution could well be a side effect of diversification. Amazon’s new business model enables customers to buy an enormous range of new and used products from a variety of retailers, with more than 400 sellers in the category of apparel and accessories alone. So, a product purchased on Amazon could well come from PacSun, Fred Meyer Jewelers or Target. This creates confusion in the eyes of consumers because Amazon is the merchant making the sale, but the retailers in Amazon’s stable are responsible for supporting the sale, so any issues with service, product quality, shipping, etc. could negatively affect their opinions of Amazon. And, with the move away from its focus on books and music, Amazon’s product inventory is composed of far more complex and sophisticated products that require more customer service. Leading online retailers in the categories where Amazon now competes have adopted toll-free customer service lines and live chat to meet the greater demands of electronics and apparel customers. While Amazon has been broadening its product offerings for some time, its customer satisfaction score fell this year for the first time from 88, a score that had topped the e-retail category since 2002 and tied H.J. Heinz as the index leader since 2003. It’s impressive that Amazon was able to maintain such high levels of customer satisfaction in the midst of so much change for as long as it did. Barnes and Noble stayed true to its business model and product offering and has been rewarded for it. This multi-channel retailer has basically replicated its offline stores with its website, carrying a similar line of books, music, cards and calendars. Since last year, has seen its satisfaction score increase 1.2% to 87, which puts it at the top of the e-retail category for the first time., with a score of 79, has experienced a significant 3.9% rise in customer satisfaction since fourth quarter 2003. Like Barnes & Noble, this online flower retailer has maintained a focus on its core product and competency. Both of these retailers offer customers something that Amazon doesn’t: a multi-channel experience. Customers of 1-800-FLOWERS can visit a store, order via the phone or choose the website. Barnes & Noble has a significant store presence across the country and enables customers to search for local stores on its web- site. Recognizing the power of offer options to its customers, Barnes & Noble’s website touts that the company is “the only bookseller with a fully operational multi-channel strategy.” For More Information ONLINE AUCTIONS: 1.800.621.2850 EBAY SATISFACTION PULLS CATEGORY DOWN Overall customer satisfaction with online auctions is down 1.3% percent from last year (score of 78 vs. 77), in large part due to declining satisfaction with industry titan eBay. 4
  • 5. Online % Change Auction Scores 2000 2001 2002 2003 2004 (2004 vs 2003) Online Auctions 72 74 77 78 77 -1.3% eBay Inc. 80 82 82 84 80 -4.8% All Others 73 75 78 79 76 -3.8% Inc. 66 69 71 71 73 2.8% uBid, Inc. 67 69 70 73 73 0.0% Long synonymous with the online auction category, eBay is beginning to lose some of its uniqueness and appeal as it evolves as a marketplace. In the early days, eBay was a community of individuals around the world, buying and selling used merchandise and its key competition was classified ads and swap sales. While this side of eBay still exists, its success has lured small businesses to sell in its marketplace and its product line has expanded to include new merchandise, placing eBay in direct competition with other retailers. Ebay expanded its market reach and has been rewarded with revenue growth. However, while it still provides a very high level of satisfaction to its customers, it no longer holds the significant advantage it did last year. Furthermore, eBay’s success attracted more competition from auction sites, such as merchandise liquidator, Yahoo auctions and even Amazon, which sells used books and music. We are seeing a merging of the online auction and online retail spaces. Interestingly, Priceline was the only site in the auctions category to increase from last year. Moving away from an “auction only” travel model, Priceline now offers the option of booking a flight via the more traditional online business model used by Travelocity, Expedia, Orbitz and others. Priceline has found higher levels of satisfaction correlating to the additional purchase option now available to customers and its score is up 2.8% from 71 to 73. Priceline has nearly closed the satisfaction gap with the online travel leaders Travelocity, Expedia and Orbitz. ONLINE TRAVEL: A STAGNATING CATEGORY WITH LITTLE DIFFERENTIATION With an aggregate customer satisfaction score of 76, online travel has dropped 1.3% since last year. Travelocity and the “All Others” group experienced no change in scores, while scores dipped 2.6% for both Orbitz and Expedia. Online travel companies face a tough battle for customers, due in large part to a lack of For More Information differentiation among the major players in this category. Customer satisfaction scores reflect 1.800.621.2850 this lack of a clear leader; with scores ranging from 75 for Orbitz to 77 for “All Others,” which includes some of the airlines’ direct sites, hotel booking sites and car rental sites. 5
  • 6. E-Travel % Change Scores 2002 2003 2004 (2004 vs 2003) Online Travel 77 77 76 -1.3% All Others 77 77 77 0.0% Expedia, Inc. 80 78 76 -2.6% L.P. (Sabre Inc.) 76 76 76 0.0% Orbitz, Inc. 76 77 75 -2.6% While the online travel category was built on cost savings and convenience, online travel sites have a tough time differentiating on price, which is generally out of their control. It is also difficult for e-travel sites to sustain a competitive edge through service improvements because any new service offering offered on one site, such as live help, is quickly implemented by the others. E-travel sites also face increasing competition by branded hotel sites, many of which have begun offering “lowest price guarantees” on their websites to protect customers in their affinity programs, and established companies entering this business. Despite e-travel’s lackluster performance, the category still does a far better job of satisfying customers than do airlines, the nearest offline category measured by the ACSI, which scored a 66 in its last measurement. Online travel sites will need to do a better job of satisfying customers and building brand loyalty in order to differentiate themselves and thrive. ONLINE BROKERAGE: POOR PERFORMANCE BY INDUSTRY LEADER SPURS DECLINE The aggregate score for customer satisfaction with online brokerage has dropped from 76 to 75, a 1.3% year-over-year change. This score ties the most recent score for offline banking, also a 75. The decline in customer satisfaction with online brokerage sites is due in large part to a decline in customer satisfaction with Charles Schwab, whose score dropped 5.3%, from 75 to 71. Online % Change Brokerage 2000 2001 2002 2003 2004 (2004 Scores vs 2003) Online Brokerage 72 69 73 76 75 -1.3% For More Information 1.800.621.2850 All Others 70 65 73 77 78 1.3% The Charles Schwab Corporation 76 72 76 75 71 -5.3% E*TRADE Financial Corp. 66 66 69 71 70 -1.4% 6
  • 7. Like eBay and Amazon, Charles Schwab moved away from its core business model over the past couple of years to embrace a full-service approach to compete on equal footing with the other full service brokerage houses. Unlike the other two companies, it has also experienced significant financial challenges (4th quarter 2004 profits down 65%). Faced with competition from both offline and online brokerage services, this discount brokerage pioneer tried to be “all things to all people” and has suffered the consequences in lost customer satisfaction. Charles Schwab is actively trying to refocus the company on its core competencies, resulting in the lay-off of personnel, closing of sales offices and changes in leadership, including bringing back its namesake, Charles Schwab, to the helm. Analysts seem to feel that the company is on its way back to success and the hope is that customer satisfaction will also rebound. Online brokerage has an opportunity to figure out what customers want and expect and give it to those who choose the web channel. CONCLUSION: NEED TO BALANCE GROWTH AND CUSTOMER SATISFACTION SIMULTANEOUSLY Though the halo of customer satisfaction with e-commerce has slipped a bit this year, the industry still performs very well and holds tremendous promise. Many factors have contributed to the success of e-commerce companies: low barriers to market entry, lack of geographic boundaries and minimal limitations on expansion into new markets. These attributes allowed what were once upstarts like Amazon and eBay to evolve into fast-growing, successful e-commerce companies, which many times became the standard for others to follow. The lack of barriers has also allowed e-commerce companies to expand into other markets; for example, Amazon has become a multi-product marketplace for other retailers and has even entered the auction/used products marketplace. Ebay has transformed itself into a full-fledged retailer, far from its roots as a meeting place for individual sellers and buyers. This expansion of eBay’s business model provides great opportunity to expand its revenue, but also brings eBay a whole new set of competitors. Along with the new, expanded business models of e-commerce industry leaders comes a drop in customer satisfaction with the goods and services from these companies, although they are still achieving very strong customer satisfaction ratings. The true challenge is finding the right line to walk between expanding market and revenue opportunities and achieving top customer satisfaction ratings. For More Information 1.800.621.2850 7
  • 8. ABOUT THE AUTHOR Larry Freed is an expert on web effectiveness and web customer satisfaction. He is also President and CEO of ForeSee Results, a market leader in customer satisfaction measurement on the web, which utilizes the methodology of the American Customer Satisfaction Index (ACSI). ABOUT FORESEE RESULTS ForeSee Results is the market leader in online customer satisfaction management and specializes in converting satisfaction data into user-driven web development strategies. Using the methodology of the University of Michigan’s American Customer Satisfaction Index (ACSI), ForeSee Results has created a model that scientifically quantifies the elements that drive online customer satisfaction and predicts future behaviors, including the likelihood to return to the site or recommend the site to others. ForeSee Results, a privately held company, is located in Ann Arbor, Michigan and can be found online at ABOUT THE ACSI The American Customer Satisfaction Index (ACSI) is the only uniform, national, cross-industry measure of satisfaction with the quality of goods and services available in the United States. A key distinguishing feature of the ACSI methodology is its patented scientific approach to customer satisfaction measurement. The technology behind the ACSI computes scores that reflect performance, based on the relative impacts of various components of satisfaction on overall satisfaction and the likelihood of desirable future behaviors, such as repeat purchases. Accordingly, the ACSI methodology is able to isolate and determine the importance of the features and functions most likely to produce these behaviors—an important distinction from basic customer satisfaction ratings. For More Information 1.800.621.2850 ForeSee Results is a trademark or registered trademark of ForeSee Results. All other company or product names are trademarks of their respective owners. 8 © 2005 ForeSee Results. All rights reserved.