A significant part of trade turnover now takes place on the Internet. This is a specific environment, unlike ordinary stores. Even someone without the necessary capital, property, knowledge, or experience can easily set up an online store. Online stores are built on special e-commerce platforms equipped with all essential attributes of an online shop, including product catalogs linked to a database, spaces for images, descriptions, and tags. They have special product search engines, comparators, and other important conveniences for customers. Renting such a platform and purchasing 24/7 technical support for it is relatively inexpensive, vastly cheaper than running a typical retail store in a prime urban location. An example of such a platform is Allegro, where one can simply buy a storefront, and Allegro practically handles the entire sales process automatically.
Why Is Running an Online Store Profitable?
Profits in these stores are generally higher than in regular retail stores, as human costs are virtually eliminated, provided the owner takes on the responsibility of packing and shipping, which is practically standard for such entities. This gives us a fully automated retail entity with virtually no market entry barriers. So, where’s the problem?
In our analysis, we’ll exclude the issue of product resource access, as this aspect is practically non-existent today due to globalization and manufacturers’ openness to sell everything to everyone. In other words, the days when specialty stores benefited from exclusive access to rare goods are over. This exclusive access once provided a high profit margin for stores and was protected by agreements and licenses.
Easy access to product resources creates conditions for a “perfectly competitive market,” where every market participant sets prices based on the best knowledge of products and the market. Thus, prices for the same products are quite similar and mainly depend on the delivery method and time. Logistics is another component in calculating an online store’s profitability. Shipping options are widely available and easy to handle, with quality usually depending on price. In other words, because of easy access to resources and a perfect logistics offering, price cannot be a source of competitive advantage.
The same products are available both in physical stores and online. Customers who want to touch products before buying or see them in person can do so in stores. Product returns in online stores are also well-organized, no longer a barrier to online shopping. As mentioned, price does not create a competitive advantage, and delivery time depends solely on price.
Where to Find Competitive Advantage in the E-commerce Industry?
The source of competitive advantage lies in the number of registered, active customers in an online store. Why? Because trade operates on minimal margins, and transaction volume multiplies unit profit. Increasing the number of transactions multiplies unit profit, reducing fixed cost participation and leading to nonlinear profit growth before taxation.
How Profitable is It to Attract Customers to E-commerce Stores?
How do you attract a large number of individual registered customers to an online store? Through offers, prices, or quality. However, the ability to attract customers is not a competitive advantage source. Attracting a customer usually means incurring costs, as we operate under a “perfectly competitive market,” where customers are drawn in by low prices, which eventually must increase, as we cannot operate without a profit margin. Quality can be improved but never without raising prices. Some customers do not want to pay more for quality, so prices should be market-oriented, and once again, we’re covering customer costs. Attracting customers always involves costs, and one cannot base their business solely on the ability to attract them.
The secret to a successful online store is the ability to retain those customers who have already been attracted. Not attracting, but retaining them. This subtle difference in approach determines an online store’s success.
How to Improve Customer Retention in an Online Store?
Since the ability to retain customers is a source of competitive advantage, it’s worth mastering this challenging skill. Here are some examples of strategies I found while browsing online:
Loyalty Program – Customers collect points for purchases or using services, redeemable for rewards, discounts, or other benefits. Loyalty programs can increase customer satisfaction, loyalty, and encourage repeat purchases and referrals.
Chatbots – Programs simulating conversations with customers via text or voice, useful for customer service, information provision, product recommendations, and transactions. Chatbots can improve customer experience, reduce service costs, increase engagement, and conversion.
Augmented Reality – Technology that overlays virtual elements on the real-world image. It can enhance product presentations, allow customers to try or test products at home, create interactive ads, and increase product appeal, trust, and impact purchase decisions.
Real-Time Package Tracking – Technology enabling real-time tracking of shipments, improving delivery quality and security, ensuring timeliness and reliability, increasing transparency, communication with customers, satisfaction, and loyalty, while reducing costs and risks.
What is a Survival Test?
A survival test is a statistical method used to compare survival times across different groups or conditions. Survival time can refer to the time until a specific event occurs, such as death, resignation, or failure. A survival test can study various factors affecting customer retention in e-commerce, or the company’s ability to retain customers long-term.
Summary
Survival tests and Cox models are valuable tools for analyzing customer retention in e-commerce. They allow for comparing and modeling customer survival times depending on various factors. The survival analysis results can help identify customer groups at higher or lower churn risk and develop appropriate marketing strategies.
We are in an era of learning and abundant information. Data from sales registers has become a major success or failure factor. Everyone can choose their methods and run their business as they see fit. However, business rules have not changed for 4,000 years; it’s always about the same thing: achieving a competitive advantage, which in e-commerce can only be achieved through improving customer retention. Using survival tests and Cox models is relatively easy and doesn’t require financial investments, as libraries for calculating customer churn probability are freely available online. The biggest challenge is learning how to use these methods. Perhaps this is the only way to ensure a competitive edge in the tough e-commerce market.
Wojciech Moszczyński – A graduate in Econometrics and Statistics from Nicolaus Copernicus University in Toruń, specializing in econometrics, finance, data science, and management accounting. He specializes in optimizing production and logistics processes and conducts research in the development and application of artificial intelligence. He has long been involved in promoting machine learning and data science in business environments.
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