The full version of this article is available on Harvard Business Online (subscription required).

The Idea in Brief

Think that price rules the Web? It doesn’t. Long-term e-commerce profit hinges on customer loyalty. And customer loyalty rests on the traditional twin pillars of superior customer experiences and repeat purchases by your most profitable buyers.

These two pillars must be even stronger to support e-businesses. Why? Consider this: The average Web site achieves only 30% of its sales potential. Most e-businesses spend gobs of money building sites and attracting thousands, millions, of visitors. But the majority of those “eyeballs” don’t come back often enough for companies to recoup investments. In fact, over 50% of customers stop visiting completely before their third anniversary.

But here’s the good news: By retaining a mere 5% more customers, e-companies can boost profits by 25–95%—through the simple economics of loyalty. Acquiring e-customers is so expensive (20–30% higher than traditional businesses) that those customers remain unprofitable for at least two to three years. But if you can keep them loyal, their profitability accelerates much faster than in traditional businesses. It costs you less and less to service them. And they buy more and more.

Customers are especially grateful to find a trustworthy site in the bewildering vastness of the Internet. Not only do they “stick” to those companies, they also tell their colleagues and friends about them. And because “word of mouse” spreads faster than “word of mouth,” these referrals draw hoards of new customers—at no additional cost.

Read the full article on Harvard Business Online.