The consumer is king

A subtle shift in power from sellers to buyers is taking place on the Web. Free of concerns such as geographic proximity, a buyer on the Net easily can abandon one seller in favor of another with a single click. As a result, sellers--whether of information, products, or services--must do more to attract and retain buyers, particularly in these early years when Web habits still are being formed. Over time, as the percentage of savvy Web users grows, I believe the power that buyers wield will be even more evident.

The implications of this power shift are profound, and will affect how we assess the profit potential and long-term success of individual companies. Increasingly, the financial community is focusing on customers or registered users instead of page views. Those companies that do not focus on building a relationship with consumers ultimately will find that they have no customers to serve.

In the long run, having 1 trillion page views per month doesn't matter if you don't know who is visiting your site or how frequently. It is the quality of the audience and its loyalty that ultimately will drive profitability. Too few sites are focused on the customer-retention part of the equation.

I believe that most Web sites, in fact, have weak relationships with their users. Finding the right information in the right format is still too difficult for the average person, which is why few sites seem to have loyal customers. The most popular sites on the Web today, the portals, have a significant overlap in their user bases, indicating relatively weak loyalty. The introduction of personalization services, free e-mail, and one-stop shopping services are designed, in part, to increase user commitment to their sites, and are showing some signs of success.

Customer retention is important in any business, but the economic benefits are even more pronounced on the Web. Why? First, because market share will be more concentrated online than off, and the spoils will go to a relatively small number of companies that excel at serving the customer. Consumers will not want to waste time surfing the Internet. With the limited bandwidth available today, the Internet is a tool, not an entertainment medium. Those sites that do the best job of fulfilling consumers' needs will be rewarded with the greatest number of loyal users.

Service-oriented Amazon.com's success in the face of stiff competition with much stronger brands exemplifies this point. The company generated nine times the revenue and had five times the customer accounts as Barnes & Noble in their most recent quarters.

Also, loyal customers mean lower expenses. The largest expense item for Web companies is sales and marketing, including customer acquisition and retention costs. Consumer-oriented sites that have a loyal base don't have to spend as much on customer service and retention, resulting in higher operating margins.

Increasing customer loyalty can be accomplished in many ways. Personalization elements like email, home pages, and stock quotes are useful, but are ancillary services for many sites. I think a more significant opportunity exists in doing a better job of providing the core service by bringing together all of the relevant content, commerce, and community aspects. Consumers interested in Elvis, for example, may be interested in communicating with other Elvis fans, and may also be interested in a CD or a tour package to Graceland.

Many Web sites focus on content, commerce, or community, but are unable to execute across the board. Some commerce sites, for example, can execute a transaction, but do a poor job of providing the content from third parties and other consumers who could help the user make a better purchase decision. Sites that combine content, commerce, and community provide a better service for consumers, keep consumers at the site longer, and generate revenue streams from a wider variety of customer activity.

Spending a lot of money to attract new users can ensure rosy top-line growth now, but customer loyalty will determine whether there's a pot of gold at the end of the rainbow.