Amazon, Zalando, iTunes – the Costs of Registering in Online Shops
Florian Morath and Johannes Münster explored why customers always have to create user accounts when shopping on the internet
Those who make frequent online purchases know the usual practice: With some firms, one has to register up front in order to access relevant information about the products or services being offered; with others, registration isn’t necessary until it comes to the payment process; still others allow purchases per guest access. In a recent publication in Management Science, Florian Morath (Goethe University) and Johannes Münster (University of Cologne) examined which of these models is most beneficial from a business perspective.
"The motivation for the study was our own experience with online shopping," explains Florian Morath. "Registration doesn’t just cost time; it also requires that I disclose personal data. We asked ourselves if – and in which situations – it can really be advantageous for a company to create such a hurdle." The authors’ answer, according to their analytical study: Required registration pays off for online shops – and even more so, the sooner the customer must register.
Early Registration as "sunk costs"
The economic concept behind this is "sunk costs": If the registration process is de-coupled from the actual purchase decision, the (non-monetary) costs arising from the disclosure of personal data while shopping online are no longer relevant to the actual purchase decision. In contrast, when registration and the purchase process coincide, the overall impediment is higher. Theoretically, the requirement to register in advance would allow companies to demand higher prices while nevertheless increasing sales. Another advantage: Even if customers leaves before making a purchase, their data remain.
Independent from the question of when in the purchase process a customer is required to register, the "sunk costs" effect remains when the shop is visited again: By then, the effort of registering has long been forgotten and can actually become an advantage over competitors where the customer has not yet taken this hurdle. "If I have already set up an account at iTunes or Amazon, then I am also going to purchase the next music clip or book there," as Florian Morath describes the obvious process of consideration. "It takes less time and the seller already has my personal data such as email and postal address or credit card number anyway."
Paying with Data
While a registration requirement generally makes it possible for a company to raise prices, this does not rule out the opposite. Especially among those suppliers for whom customer data is highly valuable, a price reduction makes sense if it simultaneously leads to a greater number of registered customers – in extreme cases, even a price reduction to zero: "At Google or Facebook, I pay for the various services not with money but with my data," Morath notes.
In the end, circumstances also play a role in a company’s decision for or against a registration requirement: What kind of customers do I have? Are they mostly loyal or do they leave quickly? Are they more or less concerned about providing personal data? "The more loyal the customers and the less valuable their data is to them, the easier it is for a company to implement a registration requirement," according to Morath. Reputation and competition also matter: "Smaller companies or those with a bad reputation run the danger of scaring off too many potential customers with a registration requirement," the researcher explains. "They should rather offer guest accounts, or – if registration is very important to them – motivate customers to register by offering discounts."
Morath, F. and J. Münster (2017): „Online Shopping and Platform Design with Ex Ante Registration requirements“, forthcoming in Management Science.