A Dynamic Model of Customer Loyalty to Sustain ...

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European Management Journal Vol. 20, No. 3, pp. 299–309, 2002  2002 Elsevier Science Ltd. All rights reserved. Printed in Great Britain S0263-2373(02)00046-4 0263-2373/02 $22.00 + 0.00

A Dynamic Model of Customer Loyalty to Sustain Competitive Advantage on the Web GIANMARIO VERONA, SDA Bocconi, Milan EMANUELA PRANDELLI, SDA Bocconi, Milan In the Internet economy, it is relatively easy to create new business models but difficult to keep deriving benefit from them in the long term. This article presents in-depth longitudinal data on four European Internet firms showing how companies can combine affiliation and lock-in strategies to generate competitive advantage on the Web. The authors use multiple-case study methodology with interviews and data collection to derive a dynamic model of customer loyalty and underline the fundamental role played by marketing on the Internet.  2002 Elsevier Science Ltd. All rights reserved. Keywords: Affiliation, Lock-in, Customer Loyalty, Internet Marketing, Internet Competitive Advantage

Introduction In the Internet economy, it is easier to create business models than make them successful in the long run. There is much general hype created on the Web by apparently appealing websites. Recent academic literature has not been able to agree on how to preserve competitive advantage on the Web (Shapiro and Varian, 1999; Smith et al., 1999; Amit and Zott, 2000; Wind and Mahajan, 2001). The issue of sustaining competitive advantage in the Internet economy is pressing. The Internet has created a hypercompetitive situation. Brynjolfsson and Smith (2000) explain that this has some roots in the creation of a frictionless economy, where transaction costs are low, and customers can float freely from competitor to competitor. The Internet has also caused information scarcity to evolve into European Management Journal Vol. 20, No. 3, pp. 299–309, June 2002

information democracy (Sawhney and Kotler, 2001), where any node of the Web can, in theory, absorb, use and diffuse information. The result is a reduction in information asymmetry between economic agents (Amit and Zott, 2000). A result of this greater symmetry is that customers have become more empowered than they were in a pre-IT age when strategy and marketing were firminitiated and firm-controlled. Now, customers can more easily initiate and control information, with a shift in the power balance. They can interact with companies and other customers (Prahalad and Ramaswamy, 2000; Sawhney and Prandelli, 2000). Consequently, in a world where information overload is substituting for information shortage, customers can now weaken the typical buyer–seller relationship. In the past, firms could behave opportunistically by leveraging market information symmetry; now customers can behave opportunistically because they have fuller knowledge. Hypercompetition is encouraged and firms are finding it more difficult to sustain competitive advantage on the Web. This article addresses the issue of sustainable competitive advantage on the Web by exploring customer-based strategies which firms can adopt in the frictionless Internet economy. It is argued that firms who compete successfully on the Web do so by basing their strategies both on affiliation (Evans and Wurster, 1999), and lock-in (Shapiro and Varian, 1999). These apparently contradictory strategies in fact produce complementary results. The article provides in-depth longitudinal data on four European Internet players which have successfully combined these two strategies. 299

COMPETITIVE ADVANTAGE ON THE WEB

This model links affiliation to targeting strategy, and lock-in to customer analysis through tracking and profiling. The article reviews the theory of Internet customer-based strategies, sets out our research methodology, presents a model of customer loyalty, and demonstrates empirical support. It concludes with a discussion of the model and directions for future research.

Theoretical Review The Web-inspired empowerment of customers has emphasised the role of trust in Web strategy. The appropriate strategy is affiliation, and this fits perfectly with encouraging customer stickiness in a frictionless economy. Evans and Wurster (1999, p. 127) put it like this: Affiliation does not mean caring for the customer: any supplier, retailer, or navigator has to do that. It does not refer to any of the helpful, positive-sum activities by which sellers further their own interests by furthering those of their customers. That is simply good business. The test of affiliation is where the consumer’s gain is the seller’s loss. Informing the consumer of purchasing alternatives of other suppliers; explaining why a premium feature is not worth the money; sharing unflattering information on production performance or customer satisfaction.

Affiliation is derived from trust and social capital (Coleman, 1990; Nahapiet and Ghoshal, 1998). It suggests a sensitivity towards fairness, and a certain amount of stewardship. It seeks to encourage website visits and sales by ‘taking the customers’ side’ and improving customer satisfaction by providing the ‘right’ products on-time at the ‘right’ price (Urban et al., 2001). Evans and Wurster state that affiliation strategy should be based on the following principles: ❖ Creating navigational services that solve problems, not just pushing products ❖ Providing comprehensive information ❖ Adding decision-support software on content Affiliation should strengthen the cognitive dimension of loyalty, i.e. use customer trust to improve performance in the e-commerce business. Affiliation means consumers prefer a specific brand or product, believing it is ‘superior’ to the others. A different strategy (Lock-in) has been suggested for companies competing in the frictionless economy as follows (Shapiro and Varian, 1999, p. 104): when the costs of switching from one brand of technology to another are substantial, users face lock-in. Switching costs and lock-in are ubiquitous in information systems, and managing these costs is very tricky for both buyers and sellers.

Lock-in means customers are constrained by past 300

choices, and when they switch from one brand of technology, product or website to another, they incur costs. Companies can exploit this phenomenon and ‘lock them in’, increasing customer stickiness and customer loyalty. Lock-in strategies strengthen the behavioural dimension of loyalty, encouraging repeat purchasing. Lock-in originates in economic and transaction cost theory and supports opportunism by economic agents (Williamson, 1975). Lock-in strategies develop customer linkage based on supplyside policies. Shapiro and Varian (1999) suggest lockin strategies should be based on three strategies: ❖ Building an installed base of customers ❖ Capturing customers through product design and promotion ❖ Leveraging customer commitment by selling complementary products. Dolan and Moon (2000) see lock-in as giving competitive advantage to an Internet player through partial autonomy in managing its relationships with customers through commercial policies that increase customers’ cost of exit. We found the two strategies co-existing within the most effective business models we studied. Companies competing successfully on the Web not only act to build their customers’ trust and enhance customer visits to their websites through an affiliation strategy, but also prevent their customers’ switch and transform visits into continuous purchase through a lockin strategy. Affiliation and lock-in must be weighted within the overall customer-based strategy of the company to get a unique effect of increasing customer retention and succeeding in a connected world, where attention is the scarcest asset but streams of revenues and profits are still the basic seeds of company growth. In several e-commerce markets, consumer behaviour divides into two stages: information search and product purchase. Affiliation is the best strategy to foster customer trust during the information search stage as it reduces cognitive costs associated with information processing. It favours learning-based customer retention. Lock-in best addresses customer stickiness to the company website and fuels company sales, sustaining reward-based customer retention. It influences the economic costs customers have to face to complete a transaction on-line and avoids customers’ switching to a more convenient e- or re-tailer. Considering that a typical business model of any Internet player is based on content, commerce, and community, the affiliation strategy seems based mainly on content and community (learning tools), while lock-in relies more on commercial policies as a way to increase repeated purchases and customer retention (reward tools). Figure 1 summarises this idea. The free customer-based and customer co-created information provided by content and community is essential to get visitors in touch with the company (Hagel and European Management Journal Vol. 20, No. 3, pp. 299–309, June 2002


Figure 1 Affiliation and Lock-in at Different Stages of the Consumer Behaviour Process

Armstrong (1997); Sawhney and Prandelli, 2000). However, they represent a condicio sine qua non for getting the correct customer payoff – commercial policies are the most relevant in order to increase customer economic stickiness, avoid churn and improve behavioural and economic loyalty. We argue here that the correct mix of affiliation and lock-in policies is driven by a peculiar dynamic of customer-based strategy. To pursue jointly affiliation and lock-in, we show that companies must have a clear understanding of how to pace both of them. This paper aims at providing a dynamic model of customer stickiness to be used in the frictionless economy, depicting stages of the customer retention cycle on the Web and the strategic implications for managing customer relationships along the entire cycle.

Our study covers in-depth individual semi-structured interviews with vice presidents and managers in company headquarters. It also includes detailed archival and Internet data collection based on financial statements, internal documents, and industry publications. A 20 open-questions framework helped us in categorising basic points regarding affiliation and lock-in strategies, and the process mixing the two. Interviews lasted for two hours with an average rate of four respondents per company. Respondents were asked to provide detailed examples, charts and documents to clarify their statements. We terminated interviewing when saturation was reached (Glaser and Strauss, 1967). A follow-up was conducted to clarify details and integrate different perspectives. The rest of the paper describes the results of our empirical analysis, aimed at exploring our hypothesis of lock-in and affiliation combination.

Empirical Method

Findings

Our analysis follows the logic of grounded theory (Glaser and Strauss, 1967), developing a multiplecase study methodology (Eisenhardt, 1989). This method has been successfully employed in the emergent field of strategies in high-tech environments (Brown and Eisenhardt, 1997; Ravasi and Verona, 2001) and specifically Internet-based strategies (Iansiti and West, 1997; Sawhney and Prandelli, 2000; Prandelli and Verona, 2001). We based our sample of a few on the high visibility of the case studies (Pettigrew, 1990). The companies we selected are successful Internet players in the European B2C market, making customer loyalty their mission, and clearly outmanoeuvring their traditional off-line competitors who tried to go virtual, as well as other pure players in the market. They belong to different parts of the overall supply chain and can provide insights on differences between the markets. The case studies are: Ducati (motorcycle manufacturer), Chl (electronic goods e-tailer), Vitaminic (digital music provider) and Volendo (on-line grocer). They all show consistent rates of growth and two of the four companies successfully went public in 2001. European Management Journal Vol. 20, No. 3, pp. 299–309, June 2002

Our results supported the concept of a dynamic model of customer retention based both on affiliation and lock-in strategies. Both should be paced in a dynamic way to maximise customer stickiness to the website. Affiliation captures the attention of customers; lock-in turns that into continuous buying behaviour. Marketing analysis, targeting and positioning strategy play important roles in getting the correct mix of affiliation and lock-in. Figure 2 shows our model of companies balancing affiliation and lock-in to be based on five stages: ❖ Targeting is used to identify the information and proposals needed to affiliate customers with the companies’ website (stage one) ❖ A specific target segment is selected to clarify customer needs and desires, and the right affiliation actions targeted, based mainly on content and community (stage two) ❖ The segment is reached and profiled (stage three) ❖ Decisions are made on how to stick the customer 301


Figure 2 The Result of the Empirical Analysis: A Dynamic Model of Customer Loyalty

to the website through appropriate lock-in strategy (stage four) ❖ Once lock-in has been achieved, groups of customers can be more effectively targeted [through option (a)] or new target segments can be captured within the website [through option (b)] (stage five). Marketing management is self-reinforcement of customer retention, made up of customer information and satisfaction. The case studies that follow offer evidence of combined affiliation and lock-in in customer relationship management. They also highlight the dynamics of our model, showing the cyclical dependence of the different stages.

Ducati One of the world’s leading manufacturers of motorcycles, Ducati offers a complete motorcyclist experience, based on technological excellence, racing success, social events, and stylish accessories. Recently, the Internet has become a crucial part of this extended experience. The company set up a Web division at the beginning of 2000, inspired by Internet sales of the MH900evoluzione, a limited production motorbike. Within thirty minutes, the entire year’s production was sold out, making Ducati a leading international e-commerce player. Ducati’s unique capability has been to use the Internet to leverage customer relationships built up off-line, introducing a new business model based on virtual community management. The starting point of this process was a clear identification of Ducati’s target, i.e. fans dedicating their leisure time not only to riding a Ducati bike, but also personalising and maintaining it (stage 1). These are basically the customers that access Ducati’s website, to share their experience with other bikers. They also seem well oriented to use the Internet, as during the year 2000 the company registered several Internet mailing lists dedicated to Ducati and more than 42,000 messages containing the word Ducati within international newsgroups. As a consequence, all the affiliation initiatives by Ducati were targeted to them (stage 2). This occurred 302

in several ways. First, through ‘informational affiliation’. Ducati developed thousands of pages to illustrate the mechanical features of its products and allow customers to combine different components, which made it easy for individual bikers to make their best choice. Those accessing Ducati.com have responsibility for creating and animating - both in a tacit and explicit way – customer forums and chatsites, as well as sharing specific questions with experts in Ducati Motor, in this way aiming at a strong ‘bricks-and-clicks’ integration (community). More than 100 messages are posted every day. They are mostly about Ducati products and biking experience. As a consequence, they are relevant to a better understanding of the needs and desires of customers targeted. Ducati fans usually possess a broad technical knowledge and love of exchanging information (as in the ‘Tech-Cafe´ ’, a forum for exchanging technical knowledge on Ducati’s website). Beyond the Ducati community, Ducati managers participate actively in appropriate on-line magazines like Motorcyclist.com, and in other websites, hoping to collect customers for Ducati’s website such as women bikers – a fast-growing demographic group in motorcycling – as well as girlfriends, wives and mothers of Ducati fans. They also participate in other fashion virtual communities which favour broad life-style association with Ducati brands, like DKNY. Ducati then leverages this information collected from affiliation, uses software to save all the chat sessions, and provide a full-text search engine. To improve its profiling ability, Ducati will in future adopt software allowing multi-format research to analyse the syntax of customer knowledge contributions. This kind of deep-content analysis has stimulated Ducati to introduce new services, like the ‘Driving School’ – based on personalised consultancy on-line. The continuous feeding of customer knowledge and socialising within the virtual community reinforces identity and value-sharing. The valuable information collected also helps the company to track and profile visitors effectively (stage 3). Ducati systematically tracks visitors’ surfing paths, correlating them with their knowledge contributions and e-commerce activities, allowing the company to identify dominant on-line patterns of behaviour, and then to offer cusEuropean Management Journal Vol. 20, No. 3, pp. 299–309, June 2002


tomised information and services. Top management in Ducati receives daily reports on site visitors and chat-room participants, and transfers it to relevant departments. Later, profiling will be improved by setting up a structured rating system to evaluate contribution quality. The company’s goal is to improve profiling activity to identify bikers and their requirements, and to increase the conversion rate of visitors to registered users, and persuade them to contribute to forums and use e-commerce. Profiling is being improved to strengthen lock-in strategies, customised for different customer categories (stage 4). Ducati has identified three consumer virtuous behaviour traits: ❖ Users bringing in other potential users to their website ❖ Users actively contributing to forums and chatsites ❖ Users that shop in the e-store. The company has developed incentives like ‘Name the Picture’, a competition in which competitors guess which part of a bike is shown by an image. Winners enter the ‘Hall of Desmohead Fame’. Special loyalty programmes have been devised to increase customer stickiness, e.g., Ducati credits points to community members more oriented to share their knowledge or involve other people in the community. The credits earn discounts. Co-marketing schemes allow members to earn discounts in other stores, like petrol stations. Ducati has defined its targets clearly and then broadened and deepened them to achieve appropriate affiliation. The strategy tracks and profiles, customises services and locks customers into a relationship allowing for further fine-tuning of initial targets and positioning [stage 5, option (a)]. The most advanced expression of such a strategy is the involvement of customers in new product co-development activities – future Ducati bike owners can review and reject, on-line, proposed product modifications, and therefore become part of the creative process. The managers of Ducati.com have identified customers in strong relationships with the company, and involved them in virtual teams, co-operating with professionals from R&D to define attributes and technical features of the ‘next bike’. The company has developed metrics to measure the strength of customer on-line relationships – these measure the three stages of customer relationship development: content and virtual community creation; personalisation of information and services to registered users; active knowledge contribution and intensive e-commerce usage. European Management Journal Vol. 20, No. 3, pp. 299–309, June 2002

Chl Founded in 1993, Chl is an e-tailer of computers and electronic goods. Chl developed at an average 100 per cent growth rate from 1995 to year 2000, reaching sales of 160 billion liras, and becoming the leader in the B2C Italian e-tailing market with a 25 per cent market share. The company started targeting young ‘techies’ and professionals linked to the technology world (stage 1). Chl management decided to build up points of contact with customers who wanted more contact with the company and ‘brick’ information (professionals) and with those who wanted to save money from traditional shopping (young techies). A Popitt (point of presence in the territory) solution was chosen and it turned out to be strategic in the beginning to affiliate customers to the company (stage 2). On the one hand, it encouraged social contacts; on the other hand, it simplified contacts, allowing clients to pick up their products directly in the nearest Popitt, and lowering the overall price by saving transport costs. Instead of simply pushing sales up with sell-out policies, the management also enhanced affiliation through content and community. The ‘Tech-news’ section systematically updates news regarding worldwide technology and gives customers a voice in actively updating it. Nowadays, the company offers forums on 120 main topics related to ICT, like the MAC community and the forum about UMTS. Customers can also evaluate other customers’ individual comments, giving them scores on the basis of their perceived utility. Quite often, active customers choose to be identified by a specific code: every time a user logs in, his profile and all his past comments about acquired products appear. The target market is affiliated in several other ways. Since 1997, the company has been involved in a project that brings technical customers into the site to show problems and opportunities with products in the range. According to top management, free comments from expert customers are crucial to show that Chl is a neutral operator and is ‘on the customers’ side’. The project increased visits to the site and average time spent on it. The technical service offered to the target market was soon extended to the ‘Techjob’ service, which offers young fans the chance to be trained easily and find a job in the new economy. Each day, content managers gather the most interesting proposals and put them on the site. Since much of the target is represented by young people between 15 and 25, Chl management introduced a detailed service showing young candidates how to cope with an interview and how to write an effective re´ sume´ ; some of the most popular brainteasers and their solution are also explained. According to Chl’s top management, customer affiliation is directly linked to company performance. First, it generates a revenue stream from advertising 303


via banners and click-through. Second, the comto insert a Popitt in each of 300 Mail Boxes stores. munity itself is a stream of revenue. For instance, it Since the Italian ICT mass market is characterised by is clear from the Chl website that after 8:00 p.m. daily mobile ‘phone ‘addicts’, the company initiated an Mdiscounts on products are offered. Loyal customers, commerce strategy to further capture the attention of however, do not seem to give it much attention. Their new visitors. Like many portals in the B2C market, sales are distributed normally all day, demonstrating the company offered the opportunity to send SMS their trust and reliance on the company. Third, it prothrough the website, increasing the chance of being vides fresh data about customer preferences that can visited all day long. An ‘SMS tracking’ service allows be used to improve the quality of the site, its range a detailed on-line control of the purchase. Even and characteristics of products sold. The informationthough this service resembles the tracking e-mailing sharing that takes place allows for a better profiling system used by other Internet operators, the fact that activity (stage 3), encouraging a it is provided on mobile continuous reorganisation of phones, so popular in Italy, fits Chl developed at an the service and clear identifiwith the new target segment cation of features needed to by the mass maraverage 100 per cent growth represented stick customers to the site. ket. Minor differences to improve the targeting of new rate from 1995 to year buyers were introduced in To increase customer purchase 1999. When a customer tries to and avoid churn, the company 2000 design his/her own computer, has developed lock-in straa virtual operator, ‘Doctor tegies as well (stage 4). They are Orange’, can assist. This virtual assistant helps out based on discounts and promotions. Starting from the potential buyer by answering questions on pref1997, a ‘Virtual Piggybank’ was created in the webserences. It is aided by a segmentation strategy ite. The tool is a customised wallet that accumulates recently introduced by the company, which proposes credits usable for future purchases. It resembles the computers for eight different groups of users frequent flyer policies commonly used in e-commerce (videogame player, director, writer, musician, artist, business. Its unique feature is that Chl has linked it designer, system administrator, calculator). In this to the content and community parts of the site. This way the buying process is simplified. means that credits increase not only when a sitesurfer buys a specific product with promotional points, but also when he/she actively contributes to the community or creates content of any interest for Vitaminic the site. Based on customer data produced with tracking and profiling, this policy was relevant for Vitaminic is the Europe’s leading ‘digital music comincreasing the probability of first purchase and stickmunity’, operating through a network of eight sites, ing new buyers to the site via a cash-back policy (i.e. allowing record companies and independent artists providing a credit to customers who purchase to promote and sell music, and consumers to choose products). Indeed, Virtual Piggybank starts from custheir favourite tracks from a catalogue classified into tomer profiles and it is planned to provide cusover 88,000 songs (about 70 per cent for sale) and 250 tomised discounts for each customer. Promotions are genres. The company started in April 1999. Since a second tool used by the company to stick custhen, it has sold over 600 labels and more than 21,000 tomers. Chl widely advertises a huge monthly proartists have used its network to promote their music. motion, which brings many of the customers back to Vitaminic aims at offering as many genres and songs the site to check for opportunities. as possible, to attract a heterogeneous target and increase its time use (stage 1). To understand its features, the company gives a gratis CD asking for basic Thanks to this mix of affiliation and lock-in, Chl has information (gender, age, main interests and musical been able to increase the number of visits and purpreferences) as a pay-off. Its typical target has been chases for its site. At the beginning of 1999, it was shown as composed of males, younger than 25 in 75 clear from revenues that the target market was going per cent of cases, with different music tastes, showing beyond the techies and professional segments. Tracka surprising interest in local singers and musical ing and profiling data showed that Chl website was events. becoming the predominant site for those interested in buying ICT products and getting information about To attract such a fragmented target, the company technology. A number of strategies to satisfy the new made marketing investment to increase brand awaremarket were conducted [stage 5, option (b)]. A first ness, focusing on public relationships with editorial strategic choice brought the company to extend its companies. Most of its effort is dedicated to initial clicks-and-mortar policy regarding the Popitt. expanding the range in each category and increasing It is clear that in 1999 there were fewer psychological the quality standard of downloaded music. Local barriers to purchasing on the Web. However, the people manage each website. Such a choice increases mass market contacting the company at that time was organisational costs, but makes it possible to satisfy not lively, uncharacteristic of today’s Internet popuwidely differing tastes of an international audience. lation. The company signed a deal with Mail Boxes 304

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Affiliation, through service diversification, is the typithe same service elsewhere. This is the essence of cal strategy pursued at Vitaminic, progressively lock-in on the artists’ side for Vitaminic. increasing its supply of content for musicians and To lock the final customer into the commercial music fans, as well as interactions and involvement relationship, the company promotes a seasonal subin the musical experience (stage 2). The company has scription: customers pay a fixed price to download a started to distribute gratis information on the world pre-specified number of files. At the same time, cusof music and Internet, to carry ratings, themed radio tomised e-mail messages announce new music files programs and a weekly newsletter. It also presents within the selected specific genres. To increase its cli‘what’s new in hardware and software’, easily conent stickiness, the company promotes co-marketing nected with MP3 (content). The site architecture policies as well. Together with Myalert.com, it offers facilitates the development of the community. Connews and musical content via a personalised short sumers can locate artists worldwide, and get in touch message system on the cell phone. Music fans simply with musicians and music lovers, sharing ideas and have to register on either Vitaminic.it or Myalert.com experiences. They can listen to tracks on offer gratis, and select their own preferences: bands, singers, or else quickly download them at a price; the artists genres, and/or concerts, about have immediate access to an they require inforinternational audience and can Vitaminic also participated which mation. Vitaminic and Myainteract with them. To increase will develop a mobile the quality of its services, Vitin a project with Renault. In lert.com commerce system to sell CDs aminic added a search engine, and files through Wap and to make easier the search for January 2002 they jointly UMTS’ phones. To increase cusspecific songs, and a ‘CD cafe`’, tomers’ music download, Vita virtual place where customers can listen to and purchase the launched a new limited edition aminic also participated in a project with Renault. In Janubest compact discs selected and reviewed by Vitaminic experts of the Renault Clio – the ‘Clio ary 2002 they jointly launched a new limited edition of the each week. Within the ‘FreeVitaminic’ Renault Clio – the ‘Clio VitPass’ page, all the registered aminic’. All these cars are bands, musicians and singerequipped with an MP3 reader. Vitaminic has, in composers can take part in competitions and proconsequence, created a dedicated area for the downmotions. The purpose is to offer them the opportload of musical files within its website. In this way, unity of playing in scheduled events and contacting Vitaminic strengthened its relationship with targeted potential record companies involved in concert customers, becoming more pervasive in their daily organisation. To favour affiliation on the artists’ side, life [stage 5 option (a)]. Vitaminic records their songs on compact disc gratis, and with no exclusive commitments, asking for a fee At the same time, the company has been expanding only if they sell it. To increase internal cohesion and its initial target [stage 5 option (b)]. It recently created common identity-sharing, Vitaminic promotes chat a partnership with Buongiorno.it, one of the Eurosessions with special guests. pean leaders in wired and wireless services in e-mail marketing, with five million registered users, to supFollowing the affiliation of customers, Vitaminic can ply musical news and customised co-branded sercarefully track and profile them (stage 3). The main vices. Together they provide 12 e-mail newsletters purpose is to increase revenues from e-commerce. offering weekly information on specific musical The company focuses its attention on users paying genres. Vitaminic and Buongiorno will share the extra for downloading musical files or asking for specific revenues generated by these co-branded services compilations. Marketing managers analyse such aimed at reaching customers increasingly precisely information through internally-developed software, segmented on the basis of their musical tastes. A tarpaying attention to categories purchased, to underget that is increasing its size over time requires strong stand which genres and products are more appealing affiliation strategies, to refine the company posto specific targets. They consolidate the customer datitioning. Vitaminic will expand its activities in virtual abase management, to measure not only how many communities to reinforce shared identity, and to visitors use e-commerce, but also how to identify increase services for customers and artists, e.g. surfing patterns. The purpose is to understand which adding new functionality to the CD Cafe` and creating customised lock-in strategies are most effective, for new ‘Free-Pass’ services for players. artists and music fans (stage 4). Currently, Vitaminic’s artists can create and manage personalised itineraries The main innovation in Vitaminic’s positioning is the and experiences, independently creating spaces in progressive development of new services for B2B the ‘Backstage’ where they can promote their own partners. Vitaminic has enacted a virtuous cycle, radmusic, organise events and produce their own ‘fan ically enlarging its time-use, transforming the commagazine’. In this way, they have to make a specific pany from a pure B2C player into a more complete investment in the website. They would incur costs if e-commerce operator, including a B2B content prothey decided to abandon this website and recreate European Management Journal Vol. 20, No. 3, pp. 299–309, June 2002

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vider for other portals. Such portals give Vitaminic a fee directly related to the amount of traffic generated from its pages, plus a set-up fee and extra contributions from advertising. The company has extended its revenue streams to reach break-even point quickly. Vitaminic is refining the initial targeting and positioning, and also its strategies based on affiliation and lock-in, in order to feed new relationships with more sophisticated clients and leverage them economically.

Volendo Volendo is an on-line grocer, operating as a pure Internet player in Italy since June 2000. The costly impact of micro-logistics, low average expenditure, limited gross margin per purchase, and increasing number of clicks-and-mortar operators make the business difficult. To face such a highly competitive environment, the company invested in clear targeting (stage 1). Its goal was ‘giving customers more time for their daily needs thanks to digital solutions’, that is, offering them extra services and not simply convenience like other retailers. This mission came from an extended market analysis, which showed increasing dissatisfaction with services supplied by bricks-andmortar retailers in a specific customer segment: people between 25 and 45, and, more specifically, a sub-segment of men and women aged 30–35 who were fast improving their professional positions. They attributed high value to time and perceived grocery shopping as an inefficient use of time.

wine shops to taste special wines that can then be bought in the virtual shop. The company built its reputation as an efficient online operator in a country where bricks-and-mortar retailing is considered the natural way to purchase, by creating temporary welcome points in the city, to communicate new services benefits; introducing pick-up points to allow customers to take their products home directly; and finally, stimulating social contacts between couriers and customers. The company has a core competence in the in-sourcing of micrologistics: it provides training to couriers preselected by customers who look at their pictures and re´ sume´ s on the Web. In this way, a relationship based on personal trust develops in the long-run. Such couriers, all directly employed by Volendo, share responsibility for the customer relationship management. They have to collect feedback from the clients directly. Every Friday, the company organises a meeting to debrief them. All these initiatives make contact easier, contribute to reducing the perceived shyness towards on-line purchasing, and improve the level of affiliation. Finally, specific payoffs aimed at providing incentives to the customers’ advocacy attitude contribute to such a goal. If a customer suggests Volendo to a friend, both of them will obtain a special discount as soon as the new user completes the first shopping experience.

To affiliate this target a strategy was devised based on the offer of detailed and high quality services online with quick physical delivery (stage 2). To make virtual shopping trips more efficient, Volendo offers an on-line supermarket, a specialised wine shop, a virtual store dedicated to pet-world and a flower corner. It is expanding its number of product categories, for instance, recently adding a service for selling movie tickets. Beyond range extension, the company aims to make every shopping experience rich and complete. For instance, it offers an image for each product and detailed descriptions on its characteristics: the customer can enter the site, read information and make comparison among different brands, even if there is no intention to buy anything on-line.

Once customers are affiliated, it is easier to know them better through detailed tracking and profiling (stage 3). Volendo has identified three basic categories of customers, to whom it offers a differentiated newsletter: registered users with no e-commerce experience; customers with little shopping experience; loyal customers, frequent and/or heavy buyers. Volendo tracks its registered users’ behaviour on-line, paying particular attention to the pattern they follow when they shift from a category to another. It also maintains a continuous dialogue with them, through its customised newsletter and an effective call centre, integrated with the on-line system. The company stores all contributions and analyses their content. They collect important suggestions, for instance, to refine selected product categories, as well as proposing new services. The option to pay on delivery has been introduced following requests by customers, usually less confident in the use of credit cards.

Some recent partnerships with not-for-profit associations are helping to make the shopping experience more exciting and affiliate customers through extra services. Enpa, the Italian association for protecting animal rights, is contributing to pet-world pages of Volendo, and ALT suggests recipes for people with heart disease and, together with Volendo, is organising specific seminars for the users registered on the website. Co-marketing programmes are promoted to integrate the on-line and off-line experience. For example, customers are invited in some traditional

More generally, the purpose of such analysis is to stick customers to the company via customised strategies, decreasing the number of days between one shopping experience and the next, currently an average of 18 (stage 4). Lock-in, like affiliation, can assume several forms, in particular, customised discounts and services which consumers cannot find if they surf from one site to another. For instance, customers who are loyal to Volendo and purchase products twice a week, receive a customised promotion every other week. They receive discounts for increasing either the

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average amount of shopping expense or the frequency of their virtual shopping trips, as well as special cross-shop discounts, i.e. special prices, for instance, on wine or flowers to clients most loyal in purchasing in the supermarket. To face counterattack by strong clicks-and-mortar competitors, Volendo introduced a loyalty programme, based on the amount and categories of purchased products. Customers can use the ‘MyVolendo’ page, which increases speed for the target market. Customers can save all their previous purchases and a standard shopping list, create different lists for different occasions (for instance, for the week-end, for parties, for other people), re-examine all the discounts they used in the past, memorise different delivery addresses, customise different types of services and specify different habits that, on the one hand, allow for a more customised service and, on the other, speed up the shopping experience. The option ‘shop at work’ contributes to strengthen such a lock-in effect. Volendo signed deals with specific firms, granting a special discount to all their employees who shop in Volendo. Thanks to this kind of initiative, Volendo has been able to consolidate the relationship with the initial target, in some cases coming to substitute traditional bricks-and-mortar retailers for convenience goods shopping, and also to expand it, on the geographic and demographic bases [stage 5 option (b)]. On one hand, the company is entering new areas, radically reorganising in order to manage high quality micro-logistic services in all the new areas. On the other hand, the initial target, made of young professionals, has been expanding to include mid-sized families. Volendo is partnering most-visited national and local portals and changing the main claim of its advertising campaigns. Volendo has abandoned the payoff ‘take back your own time’ and are conveying the idea of a virtual supermarket where all the customers can find reliable brands. The opportunity to pay on delivery, recently introduced, seems particularly coherent with the preferences of this broader and more heterogeneous target.

Discussion and Conclusions This paper has explored the fundamental issue of customer-based strategies and customer retention in e-commerce markets. Difficulties in sustaining business models that have been recently created makes this topic relevant to understanding sustainability of competitive advantage on the Web. The Internet is making information-diffusion the new standard, and reduces customers’ transaction and switching costs. The democratisation of information requires new marketing strategies to stick customers to a company website and transform their visits into profitable relations. Literature dealing with strategies in the digital age highlights the relevance of customer relations up to the affiliation point. This approach is European Management Journal Vol. 20, No. 3, pp. 299–309, June 2002

consistent with much of the marketing literature on buyer-seller relationships, where creation of trust is essential in order to build stable relations. To put it briefly and effectively: ‘Price does not rule the Web, trust does’ (Reichheld and Schefter, 2000, p. 107). We agree with this general idea. However, in this paper we have tried to take the argument a step further. Our exploratory multi-case study evidence shows that affiliation-based trust is only one side of the coin. The successful cases that we studied emphasise a much deeper strategy based on both affiliation and lock-in. In this emerging and interdependent market, Web-based companies must grow their relationships with customers and affiliate them through content and community that target their needs. However, managers cannot assume that customer visits will transform into profitable relationships; the simple use of affiliation strategy might not be enough for that purpose. Lock-in favours stronger linkages to consumers, by providing commercial and economic incentives not to switch supplier. Lock-in is necessary to avoid customer churn on the Web. Lock-in strategy must be effectively paced and merged with affiliation to generate overall loyalty to the site. Our analysis shows that a five stages model, combining affiliation and lock-in, is the basis of successful Internet players. Both clicks-and-mortar actors (such as Ducati) and pure players (such as Chl, Volendo, and Vitaminic) base their overall customer strategy on a dynamic mixture of affiliation and lockin. This result has key implications. First, it focuses and questions assumptions about consumer behaviour. Customers, especially in B2C markets, have been considered as rational, emotional, and psychologically-involved, and driven by social dynamics. Like all actors and economic agents, consumers may also act opportunistically (e.g., Williamson (1975). It is especially true when they are offered different solutions in an efficient way, as in the case of products and services purchased on the Internet. Information asymmetry prevents companies from behaving opportunistically, but not so for customers. They can leverage their knowledge and buy information where it is abundant, while buying products – especially commodities or quasi-commodities – where they are cheap (De Figueiredo, 2000. The topic of opportunism in the purchasing process in the B2C market has received little attention. Second, while European marketing management literature (e.g. Gummesson, 1999) has evolved from a transactional perspective, where price and negotiation are the basic determinants of consumer behaviour, to a relational perspective, where quality of interactions is the fundamental driver, the Internet players we studied seem to integrate the two perspectives. They pay attention to transactional dimensions of customer relations in order to make their competitive advantage sustainable in the long-run. The easier opportunity of switching from one sup307


plier to another and progressive detachment of information from products and services increases the risk of customer churn. Firms must conceive the buyerseller relationship in a broader way. It occurs in B2B markets where reciprocal commitment is crucial to lock partners into a specific relation; firms on the Web must find a way to create stronger linkages to the market. Affiliation may not be enough. Lock-in policies such as those that we described in the four case studies can be an important complementary solution. The lock-in argument is coherent because consumers have an incentive to retrieve costs they have incurred by investing in the relationship. This cost is made up of time spent on the website, previous purchases, information transferred through community or direct interaction. Whenever consumers change the site, they must incur these sunk costs again. If lock-in policies stick customers to a website, why do companies need affiliation as well? The answer is clear from our cases. First of all, affiliation allows an extension of the customer base by sending visitors continuously to the website and, frequently, first time purchase. Affiliation systematically increases the customer base and is essential in supporting the company presence in the market, especially in a context where Web users are few compared to the overall population. When the virtuous cycle described in Figure 2 is repeated, the initial offer provided by the company will be targeted in a more effective way and positioned with several services that make affiliation to the target market even more coherent than it was in the first round. Affiliation is relevant in gaining customer trust (Evans and Wurster, 1999). The company must often act as third party to achieve customer access, because the breadth and depth of connections make competitors one click away and allow customers to switch from one site to another. However, the risk on the Internet is that customers make their shopping trips to the site with superior affiliations and then buy products on the cheaper website. For this reason, lockin strategy is important as well. While off-line retailers can leverage physical costs that the customer must bear to switch from one supplier to another, in the on-line market these costs do not exist and companies must prevent customer exit through lock-in strategies. If the two strategies coexist, a company is able to leverage and systematically increase the number of customer relationships. Targeting, affiliation, tracking and profiling, and lock-in emphasise the impressive role of marketing in the Internet Economy. As Figure 2 shows, this marketing strategy fuels a virtuous cycle made up of customer information and satisfaction. The customer lock-in permits and reinforces loyalty of the specific target segment and widens the cycle for absorbing further market segments. As the case studies demonstrated, all the players analysed successfully 308

reinforced their initial target and many of them widened it. In the connected world of the Internet Economy trade-off between cognitive and economic costs plays an important role in the consumer’s decision-making and purchasing process (Dholakia and Bagozzi, 2001). Companies in future would be well advised to integrate affiliation and lock-in, i.e. learning-based and reward-based customer retention strategies, in order to sustain the business models they have successfully created.

Acknowledgements The authors would like to thank Mahanbir Sawhney, Bruno Busacca and Michele Costabile for their helpful comments.

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GIANMARIO VERONA, Marketing Department – SDA Bocconi, Graduate School of Management of Universita` L. Bocconi, Via Bocconi 8, 20136, Milan, Italy.

EMANUELA PRANDELLI, Marketing Department – SDA Bocconi, Graduate School of Management of Universita` L. Bocconi, Via Bocconi 8, 20136, Milan, Italy.

Dr Gianmario Verona has been Research Assistant at the Center for Innovation and Product Development at the Massachusetts Institute of Technology (MIT) and is now Assistant Professor of Management at Universita` Bocconi. His research interest is focused on sustainability of competitive advantage through innovation and dynamic strategies, and his preferred empirical settings are the Internet and the Pharmaceutical industry.

Dr Emanuela Prandelli is Assistant Professor of Management at Universita` L. Bocconi. She has recently been visiting scholar at the Center for Innovation, Technology, and E-commerce at the Kellogg Graduate School of Management, Northwestern University. Her research interest is focused on digital marketing and the role of virtual communities of consumption as a tool for market analysis and innovation.


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