A new survey of customer satisfaction shows that customers are happier shopping online than they are in the real world. One Internet retailer satisfies like no other: Amazon.com. It's great that the company makes its customers so happy, but it may be doing so at the expense of profitability. Amazon should try to find a balance between the two. Until it does so, many investors won't be nearly as happy as Amazon's customers are.
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Which companies satisfy customers better: pure e-commerce sites or traditional "real world" retailers? Stories of botched orders and site outages compete with tales of shipping upgrades and excellent order fulfillment. Are Internet retailers really making customers happier than their "brick and mortar" brethren? According to data released yesterday from the University of Michigan Business School's American Customer Satisfaction Index, they are, and one in particular stands out. No surprises here -- that magical one is Amazon.com (Nasdaq: AMZN). The 411 on the satisfaction survey ASCI measured four categories under the e-commerce heading -- retailers, auctions, online brokers, and portals. We're just going to talk about the online retailing results today. It should be noted that ASCI only included online retailing "pure plays," and not traditional retailers like Best Buy (NYSE: BBY) and Gap, Inc. (NYSE: GPS) that have e-commerce sites to compliment their "real" stores. How e-commerce customers fare What makes Amazon Amazon? With a company like Amazon, it's likely that many customers continue shopping there even in the face of possible cheaper prices at other sites. Familiarity with the site and its navigation is one reason for this. Also, things like Amazon's "One Click" ordering system keeps customers coming back. The trust that builds up over time as a result of Amazon's great customer service also strengthens customer loyalty. It isn't only about getting new customers online -- customer retention and loyalty matter perhaps even more. Is Amazon trying too hard? Amazon eating the cost for the shipment upgrades is one piece of evidence for this. Also, the company's habit of multiple shipments for single orders, even when that service isn't requested, certainly satisfies the customer, but dilutes operating efficiency. Amazon's desire to sell everything to everyone and satisfy each and every customer makes the goal of profitability seem ever more elusive. Today's news, in light of this, seems almost bittersweet. Those darn shipping costs The key will be to see how the company handles its holiday traffic and orders this year. In last year's fourth quarter, those marketing, sales, and fulfillment costs took up 26.5% of revenues, which was well above the previous year's. Amazon has to find a way to control those costs this season. It has to find a balance between great customer service and increasing its operating efficiency so it can reach profitability. It's sweet that Amazon has such amazing customer service. I don't mean to belittle its outstanding results in this survey. Amazon has yet to turn its supremely happy customers into surrender profits, though, and until that happens many investors won't be nearly as satisfied with the company as its customers are. Your Turn:
The American Customer Satisfaction Index (ASCI) measures the quality of customer experiences and attempts to quantify it for many different industries and companies. It also creates a national score for overall customer satisfaction. Industries and individual companies are scored on a 0-100 scale. The addition of e-commerce companies into the index is new with these results.
On the whole, the e-commerce industry scored higher than the current national customer satisfaction average, with a score of 73.2 versus 72.9. E-commerce retailers, though, scored much better than that, with a score of 78. The most recent score for traditional retailers lags at 73.3. Amazon scored an incredible 84, which is ahead of two of the best-scoring real world retailers. Costco's (Nasdaq: COST) most recent score is 79, and Wal-Mart's (NYSE: WMT) is 78.
What is it that sets Amazon apart from its competition both on the Internet and off? Lots of things, in my opinion. For one, its status and branding as "the" place for online shopping for books and CDS, among other things, draws in new customers. The company's record of near-perfect order fulfillment and speedy shipments with frequent shipment upgrades keeps customers coming back. On the Internet, where the competition is easier to find and get to than it usually is offline, and where price comparisons are much more transparent, excellent customer service is what separates the successes from the failures.
But at what cost is Amazon building these relationships? Is the company sacrificing eventual profitability in order to make every customer as happy as possible? Is it going over the line? Maybe, Fool writer Rick Munarriz said last week.
The company's shipping costs have come under a microscope before, and they are likely to again this holiday season. In its most recent quarter, the company's marketing, sales, and fulfillment costs, which include shipping expenses, shrank as a percentage of revenues to 21.6% compared to the year-ago quarter's 24.4%.
What do you think? Is Amazon going above and beyond what it should be doing to satisfy its customers? If you're both a shareholder and a shopper, do you feel happy when you get a free shipping upgrade, or a little discouraged? Talk about it with other Fools on the Amazon discussion board.
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