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The push toward better customer service

There has never been a better time to be a customer. The land grab frenzy and the capabilities of the online medium have dramatically shifted the balance of power in the retail world in favor of consumers.

Are these the last days of disco, or are we really entering a new era of customer service?

In our opinion, there has never been a better time to be a customer. The land grab frenzy and the capabilities of the online medium have dramatically shifted the balance of power in the retail world in favor of consumers. Forget the delivery windows of four to six hours common in the brick-and-mortar world. WebVan, the online grocer, promises to deliver your groceries "Domino's-style" in a 30-minute window selected by the consumer.

Kozmo.com will deliver staples such as Ben & Jerry's ice cream, movies and CDs within an hour of the order. Ashford.com has personal gift advisers to help consumers make the perfect luxury gift purchase. And AOL's "At Your Service" feature directs consumers to merchants that offer free shipping, gift-wrapping or bonus gifts. In the online world, the customer can truly be king.

Why are we seeing an increasing amount of attention focused on customer service? The ferocious battle for market share and revenue-based valuation practices encourage companies to spend almost without regard to the bottom line to get customers to come to their sites. With the number of new people coming online growing steadily, companies must continue to spend heavily to attract new Web users to at least maintain, if not grow, their market share.

Upward-spiraling customer acquisition costs, however, are driving companies to focus more on what they can do to keep the customers they already have. With low switching costs for consumers, companies must constantly innovate and find new ways to provide good service to customers to keep their loyalty.

In this environment, the outlook for consumers is rosy. The tremendous amount of money flowing into Internet start-ups ensures that competition for consumers' wallets and attention will remain high. And as long as companies are rewarded for a revenue focus as opposed to profitability, they will have a lot of leeway to spend heavily to attract and retain customers.

The outlook for e-tailers is challenging, however. Most have tried to build loyalty by building their brands and outspending their competitors. But a company's viability will ultimately be determined not only by its ability to attract and retain customers, but by its ability to do so cost-effectively.

With gross margins for most e-tailers at less than 25 percent, the long-term profitability outlook is bleak given the current environment. Customer acquisition and retention costs are already high and seem to be moving higher, and customer lifetime values are uncertain, particularly when switching costs are so low. Spending $200 on average to acquire a customer will never make sense--no matter how many customers a company has--if the customer's average lifetime value is less than $200.

For these reasons, customer service is becoming a bigger focus for e-commerce companies. It costs less to sell more to existing customers than it does to sell to a new customer. As a result, we expect that customer service initiatives will only get better in the near term.

With access to capital getting easier, we believe the key differentiating factor is service. Those companies that do the best job of servicing their customers will be most effective at keeping them.

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