Keywords: online markets, satisfaction, loyalty, services, Internet, e-Commerce

1.0 Introduction

The rapid growth of online transactions in the service industry raises interesting research questions about the levels of satisfaction and loyalty in the online environment, and the relationship between satisfaction and loyalty online relative to offline. Comscore Networks estimates that online consumer sales in the U.S. reached $53 billion in 2001 (Comscore Online Spending Report 2002). Compared to the offline environment, the online environment offers more opportunities for one-to- one marketing (Wind and Rangaswamy 2001). These opportunities may influence customer satisfaction and loyalty differently in the online environment vis-à-vis the offline environment.

Managers are concerned about how the online medium influences satisfaction and loyalty and the relationship between satisfaction and loyalty. Typically, online customers can more easily compare alternatives than offline customers, especially for functional products and services. A competing offer is just a few clicks away on the Internet. Because of this potential for “frictionless commerce,” many managers fear that the online environment might raise customers’ expectations about the service, making them less satisfied and also more prone to switching to, or among, competing services. In other words, the online medium may induce lower customer satisfaction and loyalty compared to the offline medium, and that increased satisfaction with a service may not lead to higher loyalty when that service is chosen online.

Some recent studies show that there may be systematic differences in customer attitudes and behavior for services chosen online versus offline. For example, price sensitivity may actually be lower online than offline (e.g., Degeratu, Rangaswamy, and Wu 2000; Lynch and Ariely 2000). Although the online medium increases consumers’ proclivity to search for better prices, it does not influence the importance customers attach to price (Shankar, Rangaswamy, and Pusateri 2001). Brand names (brand equity) could also have higher impact online than offline (Degeratu et al. 2000). Collectively, these studies suggest that a priori, customer satisfaction and loyalty for services may be different online (compared to offline), and not necessarily lower online. However, we do not know of any academic research studies that have carefully explored how the online medium influences customer satisfaction and loyalty. Does the online medium positively or negatively impact customer satisfaction or loyalty (other things equal) and why?

Satisfaction and loyalty are not surrogates for each other (Bloemer and Kasper 1995; Oliver 1999). It is possible for a customer to be loyal without being highly satisfied (e.g., when there are

few other choices) and to be highly satisfied and yet not be loyal (e.g., when many alternatives are available). Firms need to gain a better understanding of the relationship between satisfaction and loyalty in the online environment to allocate their online marketing efforts between satisfaction initiatives and loyalty programs. If, for example, the firm finds that greater loyalty is associated with increased satisfaction such that loyalty reinforces satisfaction, it could directly focus on enhancing its loyalty programs.

Several studies have explored the relationship between customer satisfaction and retention on behavioral loyalty (customer’s repeat purchases from an organization) in the offline environment (e.g., Bolton 1998; Crosby and Stephens 1987; Gronholdt, Martensen and Kristensen 2000; Reicheld 1996; Rust and Zahorik 1993). Collectively, these studies have found qualified support for the positive impact of satisfaction on retention, although, interestingly, satisfied customers may defect to competing products and services (Reicheld 1996). Research by Bain and Company has shown that the returns to loyalty-building initiatives are in the double -digits (Baveja et al. 2000), and Rust, Zeithaml, and Lemon (2000) show that under certain conditions, it may be better to focus directly on loyalty-building initiatives (e.g., frequent-user programs), rather than work on satisfaction-enhancing efforts (e.g., total quality management).