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From what I have experienced with online shopping, I will write below.

I usually buy cycling goods from a popular UK website. The prices there do not compare with the AUS market here, and to top it off, if I spend more than $85 in goods, I get FREE postage to Australia from the UK. The last 3-4 times I have also shopped thru this cycling website, I also get additional discounts for being a loyal customer.

I have shopped at Australian and US Online stores and while I like to support the local underdogs, it makes it harder to shop locally as the local shops I like to shop at usually have more expensive products and no free postage option for a minimum spend limit. Or if there is a minimum spend limit, it is far higher than I am willing to purchase goods with. (this does not include Ebay which I know you can get free postage with)

To compete, I feel you need to adapt and think of new ways to generate interest in your business rather than being strict in not reducing your own margin. Sure don't undercut yourself to oblivion, but look for other ways to make the customer feel like they are getting a good deal while still making some profit and still surviving.

Those that shop online who know what they want are usually interested in a) a good deal/cheapest price, b) a quality product and c) getting a warranty/return option on those goods if required.

Customer service I have found in my experience is mainly reserved for in-shop customers who want to ask questions, get advice, and prefer to deal with a person face to face, and they are happier to pay more for the privilege.

Take this how you will.