December 11, 2000

http://www.informationweek.com/816/king.htm

Are Customers Kings?

Businesses: Listen up! Widespread use of the Net is creating a new breed of customers, better-informed and more demanding.

By Jeff Sweat

ameron and Tonia Fuller had almost resigned themselves to spending more than six hours of their Christmas vacation in Phoenix. In the airport, that is.

That's because the only available flight for their trip from New York to Salt Lake City involved a six-hour-plus layover in Phoenix--longer than the flight itself. But while husband and wife were on the phone with the travel agent, they logged on to America West Airlines' Web site and found a flight with a 40-minute layover that the travel agent hadn't seen on her reservation system. They told the agent, who called the airline to confirm that the flight did exist--and booked it. "I felt that we knew more than the agent did, since we had the Web site there and she didn't," Tonia Fuller says. "There was a feeling of power, to be able to find information that helped us."

But the Fullers couldn't act on their newfound information on their own. America West wouldn't let them buy the tickets over the Web because they were traveling on vouchers from a previously delayed flight, so they had to depend on an agent to set it up. The whole thing could have ended badly. Says Tonia Fuller, "Without the Internet, we felt like we'd still be sitting there in Phoenix."

Ahh. The feeling of empowerment. Rather than letting businesses call all the shots, customers may finally be gaining some leverage. "There's a customer revolution going on, and it's been triggered by the Internet," says Patricia Seybold, head of the Patricia Seybold Group, an IT consulting firm, and author of the forthcoming book The Customer Revolution: How To Thrive When Your Customers Are In Control (Random House, 2001).

That customer revolution is exemplified by several factors: Customers have become smarter, or at least more educated, because of the Web. They get information about companies, products, and prices and make decisions based on that information. They also benefit from strength in numbers. Online marketplaces, for instance, give small companies deals once reserved for the largest ones; online communities and discussion groups help customers share experiences about retailers or suppliers, good and bad.

But there's a flip side: Many companies are using the Internet to their advantage. They're gathering more information about customers than ever before and placing a value on each customer. The more money a customer spends, the quicker businesses will respond to a problem.

As a result, there's a power struggle between consumers and businesses. Customers are demanding more consistent, higher-quality service across all channels, and the ones that ignore the demand face a fickle consumer culture used to immediate gratification and almost unlimited choice. The adage "the customer is king" is starting to ring true. JetBlue Airways launched in January with that as a major theme. "JetBlue evolved because we knew the customer was king," says Frankie Littleford, the airline's VP of reservations.

Truth be told, most companies have a long way to go; customer service in many cases still stinks (see "Customer Disservice," June 21, 1999, p. 65; informationweek.com/739/service.htm). Asked if she thinks customers are gaining control, one disgruntled consumer grimaces. "No way. They're absolutely victimized and helpless," says Sharon Simonson, an agent for Nel, a Netherlands photography agency. When Simonson helped Nel establish a New York office in June, Nel ordered digital subscriber line service from Verizon Communications, which promised delivery within six weeks. That time passed, no DSL, so Simonson started calling.

The problem quickly became apparent. "Every time I called a customer-service representative, he'd pull up a new file and start over," she says. It wasn't until Simonson serendipitously dialed a different contact number that she came across an "account detective," someone who could trace the order's history. That person had to start over as well, but this time saw the installation through to completion--four months late. Simonson can go home, but she says she won't forget the helpless feeling: "I felt like I was sitting on my fingers and dialing with my tongue."

That feeling of helplessness is at the root of the customer power grab. The first thing customers are doing is gathering information. A savvy customer is less likely to settle for a bad deal. They increasingly know what a product is worth and who has it. It's a simple matter of access. Before the Internet, a cross-shopping customer had to really want a lower price because finding it involved working the phones or driving all over town.

The Web offers relatively simple product comparisons. Even when customers plan to buy a product in a retail store, they can find the best price within minutes by visiting competing sites. That's true for everything from CDs to cars. Comparison sites such as MySimon.com track inventories and prices of thousands of retail sites so that customers can find the best deal in one place.

Perhaps just as important, consumers know more about products and services. Customers can research drugs or medical treatment and tell physicians how they think they should be treated (see story, p. 60). Or they can buy a car armed with a printout from Edmunds.com containing details about a car's safety, quality, and price. That gives salespeople much less wiggle room to set prices, says one car salesman at a Saab dealership in Bayside, N.Y.

One of the biggest factors that gives customers power is the variety of options; scores of businesses are vying for their attention. The Internet has brought virtual options to every brick-and-mortar business--Amazon.com in books, eToys in toys, Carpoint.com in automotive. There are new selling models, too, from eBay's auctions to Priceline.com's name-your-own-price airfare.

The result may be a growing lack of customer loyalty, analysts say. If customers aren't pleased with prices or service, it's relatively easy to switch to another vendor.

That choice may be deceptive, though, partly because the day of rock-bottom Internet prices may be over, and partly because the Web may be moving toward uniformity. Look for a product on MySimon.com, say an elliptical exercise machine, and it becomes clear that not only do competing vendors such as Sports Authority and Fogdog Sports stock the same product, they charge almost the same price when shipping costs are factored in.

Some IT executives argue that consumer freedom of choice is illusory, even if there are differences in price. Not that customers can't shop around; it's just likely that they won't. It doesn't always make sense for buyers to form relationships with several suppliers, says Larry Blazevich, CIO of chemical manufacturer and distributor Sigma-Aldrich Corp. "If you have 10 different vendors, you have 10 different FedEx charges. That's not too efficient," he says.

Blazevich is referring not only to the St. Louis company's relationships with its customers and suppliers, but to the business-to-consumer world as well. For example, if an Amazon customer wants to check prices plus shipping at Amazon's rivals, he or she must initiate an order on each site, which includes registering and filling out shipping and credit-card information. After going through that hassle once or twice, most customers probably won't hesitate to pay another buck or two for shipping.

The Internet may help customers feel more powerful in areas such as comparison shopping, but it's not always going to help the consumer in a head-to-head interaction with a customer-service representative concerning a broken or undelivered product. The anonymity of the Web, in fact, can end up being less effective than yelling at a store manager in front of a line of sympathetic shoppers. "When I really want something done, the Web's the least-effective way to do it," says Adam Wilcox, a research scientist for Columbia University in New York and a frequent online shopper who prefers to deal with problems in person.

But as a group, customers do wield power, and the Net can help the disenfranchised come together. Exchanges, marketplaces, and other E-commerce sites aggregate businesses and individuals to increase their buying power. Dollardex.com, a Hong Kong E-commerce site, lets customers band together to negotiate lower mortgage rates. A group of potential home-buyers can put out a request for proposals for mortgages and negotiate group deals so that everyone gets the same lower rate. Opus360 Corp., a maker of workforce-management software, operates a staffing site for professional freelancers, called Freeagent.com, that uses the cumulative buying power of its members to offer them benefits such as health insurance and 401(k) plans.

What's more, the Internet can help consumers' voices be heard. Instead of mailing letters, customers can send E-mails or initiate Web chat sessions, which are more convenient and usually more immediate. Lands' End Inc. lets its customers chat with service reps. If they have a problem finding an item on the Web site, the representative can guide the browser to that Web page.

Getting word out on the Web has further implications. Feedback sites such as Gomez.com let consumers rate E-commerce sites where they've had good or bad experiences. To the displeasure of many big companies, Web sites with names like SuchAndSuchCompanySucks.com or IHateThisBank.com pop up online and flourish for weeks with complaints from disgruntled customers.

The Motley Fool, an online investment community that offers news and investing strategies, has helped change the way the financial industry works. For years, the Securities and Exchange Commission let companies feed financial information to Wall Street analysts a day before the public had access to it. When the SEC chairman asked for a review of that policy earlier this year, thousands of E-mails poured in from Motley Fool alone. As a result, the SEC changed the rule in October; Regulation FD now gives the public information at the same time analysts receive it.

Internet communities have affected other industries, as well. The retail music and recording industry is still reeling from the effect of MP3 technology and the Napster community that exploited it. And car salespeople can't lie about the invoice price of a car; they're all listed online.

Instead of fighting these new online communities, smart companies are trying to capitalize on them. Borders Group Inc., for example, doesn't focus only on a customer's relationship with the book and music store chain; it also focuses on that customer's relationship with other customers--the community. Making customers feel as if they're part of a community is a powerful way to keep them tied to the business. And Borders isn't just using the Web for community building, it also brings local musicians to play in its stores and authors to give readings. Its online newsletters keep consumers in touch with their communities.

Even those consumers who don't want to band together are gaining power--provided, of course, that they're strategic to the business. Good customer service often depends on how well a business knows a particular customer. Simonson's photo agency had some disadvantages built into its customer-service nightmare; it's a small company, and it was new to the United States. Moreover, Verizon's systems failed to keep track of Nel's interactions--perhaps, Simonson says, because Verizon was still trying to handle the merger of the two companies that created it, GTE and Bell Atlantic. A Verizon spokesman attributes the problem to high demand: "We're very aware of it. If we don't fix it, customers will leave," he says.

Contrast that with the experience of Carl Ferrando, a clothing designer who ordered flowers over the phone from 1-800-Flowers.com for a surgery-bound friend while on a business trip in Arkansas. The flowers were supposed to be delivered to the friend's apartment building as a surprise, but they never arrived. Ferrando didn't find out the flowers never made it until days later, when he received an E-mail from the flower company. He called, and a rep told him the flowers weren't delivered because there was no phone number on the order. The company agreed to send the flowers immediately.

The second delivery also never arrived. This time Ferrando sent an E-mail, demanding to speak to a higher up. He got a call at work shortly after from a supervisor. While on the phone with that person, a customer-service rep called. Ferrando kept both of them on the line and worked them against each other to negotiate a fair compensation for his troubles. "I was flipping between the two phones to see who would give me a better deal," he says.

They ultimately offered him his first delivery for free and 40% off a subsequent delivery. But Ferrando says the offer probably had less to do with his negotiating skills than with the fact that 1-800-Flowers knows his history with the company. "They have a record going back for at least 10 years that shows I've been using them at least twice a year," he says. "Because they see that there's never been any kind of issues, they went above and beyond in responding to my problem."

That's what customers want to hear. But what do businesses think about the new breed of customers? "The more information the customer has, the more likely he'll make the right choice," says Ted Ross, manager of owner loyalty and customer-relationship management at Nissan North America in Gardena, Calif. The biggest source of dissatisfaction for most customers is the feeling that they may have bought the wrong car, and doing homework beforehand means that's less likely to happen, he says. Nissan has included the kind of details on its site that it used to put in brochures.

Others recognize that educated customers are more difficult to please. They know what's possible from their online research. And if companies don't meet those expectations, that could spell the end of the relationship. Customers "have more power because they better understand their choices," says Gordan Eiland, VP of planning and analysis at Borders. With a more well-informed consumer, we have to do a better job meeting their needs."

Educated customers rely on information, so businesses are supplying it along with tangible goods. It's a common E-commerce approach. For example, Borders.com includes book and music reviews on its Web site and sends out newsletters aimed at particular audiences. Auto retailing sites such as Autobytel.com Inc. include driver reviews, auto-safety reports, and Blue Book prices for used cars. By bringing all this information to one place, companies increase the odds of consumers visiting their sites and buying something.

If businesses can make it simple and enjoyable for customers to interact with them, customers aren't likely to switch to another supplier because they may not be treated as well. Airlines figured this out before almost anyone else, and take it a step further, offering special services to customers who fly more often and pay higher fares (see story, p. 56). It creates loyalty. For example, a traveler who's reached platinum status on American Airlines isn't likely to give up perks such as first-class check-in or bonus mileage for a Northwest Airlines fare that's $50 cheaper.

Companies have to focus on outsmarting the smart customer, and that means knowing what customers want before they ask for it. Not all businesses have the advantage of gathering the kind of data that airlines have, but they're trying out their own loyalty programs. Barnes & Noble Inc. recently launched a program in which customers can present cards when purchasing books. The cards tell the retailer who the customer is, which can be linked to the books just purchased; in exchange for the information, customers receive discount pricing and, ultimately, targeted offers.

Loyalty programs involve a sort of tacit agreement; customers give access to personal information and spending habits, and businesses give better prices and better treatment. For some customers, it's an invasion of privacy that's not worth the savings. For others, though, it's a deal worth making. "It's a fair trade. It wouldn't be if I didn't realize I was trading that information," says Wilcox, the Columbia University scientist. "But if they can waste less of my time with more targeted advertising, then fine."

Borders has a loyalty program in its WaldenBooks division and may put one in place in the Borders bookstores. The Ann Arbor, Mich., company is also putting Internet-connected kiosks and PCs in all of its stores and is experimenting with giving customers passwords and user names so they can get customized information and sales.

Borders plans to link that information to data culled from customers' online activities, Eiland says. The company is about to deploy E.piphany Inc.'s E.5 application, which will analyze that information and look for patterns in customer activity. The software can then be used to build marketing campaigns for particular segments. If a customer has bought all four Harry Potter books, for example, Borders can send that person an E-mail about the Potter calendar for 2001. The point of the E.piphany-driven data repository is to make sure that customers see only the information that pertains to them. "This will help us to give more of what customers want and less of what they don't want," Eiland says.

As customers grow accustomed to this intuitive treatment online, they'll expect it across all channels, analyst Seybold says. The computer industry is a case in point. Dell Computer pioneered an E-commerce site where consumers design and buy exactly the PCs they want. The model has been so successful that customers started demanding it from other PC manufacturers, including Gateway Inc. and IBM, Seybold says. Gateway's customers wanted to see and try the computers before buying them, prompting the company to open its Gateway Country stores. "Gateway's multichannel approach was definitely driven by customers," she says.

Customers can dictate when and how they want to see a company, too. In the past, retail customers had to head to a store during business hours or use a catalog. Now they can communicate with businesses at almost any time or through any channel. They can purchase goods and get information online, ask questions via chat or E-mail, call on the telephone, or even visit a store. For the first time, the interaction is calibrated to the customers' schedules, not to the company's.

Connecting channels has been difficult for many businesses. That's one of Borders' biggest challenges these days. Like rival Barnes & Noble, Borders has been criticized for the disconnect between its traditional bookstores and its burgeoning Web business. But the company is trying to make the two businesses act in unison. "We're trying to pull information together so that the customers can control it from wherever they want," Eiland says.

Among its initiatives: letting customers check store inventory online, pick up online orders from a local store, and lo-cally return books that they bought online rather than ship them back to the company's fulfillment centers. The Internet kiosks the chain is putting in--some 4,000 in more than 300 stores--will let customers who don't find books in the store order from the online database of 3 million titles that both Borders.com and Amazon.com use. Borders also could have online purchases delivered to stores as part of regular stock shipments, meaning lower, or even zero, freight charges.

Ultra Stores Inc., a $100 million discount jewelry chain in Chicago, is trying to combine its retail and E-commerce channels. One way is to make sure that its merchandising and sales campaigns are identical across both channels, a task it's accomplishing with E-commerce software from OneSoft Corp. The company is also trying to combine customer information contained in online data repositories and point-of-sale devices. They're linked, but the process of combining the data takes a couple of days. "We want it to be instantaneous," says Mitch Greenwald, Ultra Stores' chief technology officer.

Perhaps one of the best lessons a business can learn is that if customers want to take matters into their own hands, let them. When JetBlue launched in January, 20% of its flights were booked online. But the company uses a simple booking engine that makes online booking easier, and now roughly 40% of its business is conducted online. "Customers want to be able to log onto a computer and not make a phone call," Littleford says.

The self-service angle is carried out elsewhere. JetBlue also has kiosks in its terminals to let customers check in without ever dealing with an airline representative--the kiosks even ask the security questions. (Human interaction is still required if a passenger wants to check bags.) Another nod to simplicity: JetBlue has a fixed-fare structure without advance-purchase requirements; prices go up only as people snap up the cheapest seats.

JetBlue is new, so it has an advantage adjusting to customers' demands because it doesn't have business traditions to transform. But other businesses are transforming themselves in an effort to attract and hold onto new, better-informed customers, who know more about products and competitors than ever before. If some businesses are starting to act as if customers are in control, maybe they're on to something.