How To Make an Online Business Click

In spite of the dot-com implosion, Web-based businesses continue growing at a fast clip. Indeed, the Internet is now extending its reach beyond sales of just books, music, PCs and travel services. Some analysts predict that in the near future it will revolutionize other industries, such as real estate, insurance and education. And with that expansion, numerous companies are struggling with a classic problem: What product and service features should they offer to maximize customer benefits without blowing their budgets?

Specifically, what kinds of trade-offs make the most business sense for attracting and retaining online customers? The objective is to invest in features that customers truly value — and to stop wasting resources on things considered unimportant.

Ongoing research of online financial services in the United States sheds some light on the many trade-off issues. A longitudinal study, which began in 2001 to investigate the preferences of approximately 2,200 customers, is being conducted by Rohit Verma, a professor at the David Eccles School of Business, University of Utah in Salt Lake City, and Zafar Iqbal and Gerhard Plaschka, professors at the Kellstadt Graduate School of Business, DePaul University in Chicago. Their report is “Assessment of Customer Choices and Preferences in Online Financial Services.”

The researchers selected financial services because of the industry’s information intensiveness and because of its potential for performing various fundamental activities online, including banking, money transfers and stock trading. The study participants are active customers of online financial services who had been selected by a national marketing research firm. The participants’ demographic mix is fairly balanced in terms of age, sex, marital status, education and income.

To determine customer preference, the study subjects are given multiple alternatives and are asked to evaluate them and choose. The various Web-based product and service features include traditional as well as online functionality, the price per transaction, backup availability to a brick-and-mortar facility and specific promotions for new customers, such as a $100 credit for opening an account. Not surprisingly, the study finds differences among various customer segments. For example, people who use online services frequently tend to be more sensitive to price. But other results are less obvious.

For instance, customer assets (which range from less than $30,000 to more than $250,000) do not seem to affect the value placed on the different online features, such as the availability of real-time information and access to advanced analysis tools.

In addition, the researchers are investigating how switching inertia varies across the different customer segments. Specifically, they are looking at the likelihood of someone switching providers, depending on the current type of service, the frequency of usage and the size of the customer’s assets. One important finding is that customers with more assets are generally more inclined to stay with their current provider. Thus, an important insight from the study is that a new business offering online financial services may be better off initially focusing on people with fewer assets. Similarly, according to the research, customers with high levels of transaction ­frequency also appear to be good potential targets.

The study has a number of important implications for the design and day-to-day management of online financial services. The researchers find that any paired combination of three things — the price per transaction, the availability of traditional features (such as professional­ management of accounts) and the offering of online-only functionality (such as convenient real-time accessibility of accounts) — is sufficient to overcome the switching barrier for any customer segment. In particular, the price per transaction appears to be the single most important feature driving customer choice. That said, companies can overcome a customer’s price sensitivity by providing a judicious combination of traditional and online features. In other words, customers are more than willing to pay for the right mix of functionality.

The researchers have confirmed their results in other studies of both online and traditional businesses. Additional details of their online financial services research are contained in the paper “Choice Drivers and Switching Inertia in e-Financial Services.” Researchers Verma, Iqbal and Plaschka can be reached at rohit.verma@business.utah.edu, ziqbal@depaul.edu and gplaschka@mindfolio.com, respectively. Contact Verma for copies of their reports.