December 26, 2000, 9:55 AM

Blue Martini mixes merchandising with tech-head expertise

Blue Martini, an up-and-comer in the highly competitive e-commerce software arena, likes its R&D stirred, not shaken. Its go-slow approach to market research has paid off with distinctive merchandising features that drew the likes of Levi Strauss & Co., Gymboree Corp. and Men’s Warehouse to its client roster.

“Most people build their software before understanding the market,” says founder Monte Zweben, former co-manager of NASA’s principal artificial intelligence lab. After launching the company in June 1998, Zweben and his team spent the next three months talking to large retailers and manufacturers about the market’s needs. “To be truly successful,” says vice president of marketing Bill Evans, “we not only had to know the technical side, but how retailers would use our software.”

One aspect of the market that Zweben and company clearly understood is that commerce server software-the workhorse that allows retailers to do business on the Web-is booming. Among e-retailers, says a report by Forrester Research, 60% prefer buying applications in place of building their own.

And that translates to explosive growth, with sales of commerce server software expected to rise nearly 300% this year-from $215 million in 1998 to $675 million, according to International Data Corp. Enter Blue Martini, which, along with other new players, is determined to give established vendors a run for the money.

It’s a familiar run for Zweben, a startup veteran who earlier founded Red Pepper Software. The firm, which sold a supply-chain management product, was purchased by PeopleSoft in 1996 for a tidy $250 million. Zweben has even bigger plans for Blue Martini, intending to turn it into a $1 billion company within the next decade. With sales under $25 million this year, it’s an ambitious goal.

Test, test, test

Yet Zweben aims to get there by continuing to mine the market for ideas from his customers. The current version, for instance, started with prototypes tested on 60 e-retailers. After each test, Blue Martini developers conducted interviews. Comments such as “too clumsy” or “too many mouse clicks” sent them back to the drawing board to refine product design, screen prototypes and even their sales pitch. “In the end, we had a killer detailed design as well as a compelling sales demonstration,” says Zweben.

E-Merchandising System, Blue Martini’s Java-programmed flagship product, debuted in March. Just as its name suggests, merchandising is the software’s hallmark. “It is aware of the known problems that retailers face,” says IDC analyst Dennis Byron.

In fact, at the Internet Outlook conference, an industry event hosted by Technologic Partners this fall, Blue Martini was among 10 companies voted “most likely to succeed.”

Martini’s system is already reducing headaches at Gymboree, a children’s apparel retailer in Burlingame, Calif. “Our previous software made entering new SKUs into the system cumbersome,” says Jennifer Jung Sanchez, Gymboree’s online operations manager. Under the store’s old system, she and her staff entered prices separately for every size. With 350 new products being added each month (and an average of five sizes per item) that meant about 1,650 manual entries. Yet with the E-Merchandising System, all Jung Sanchez does is type “$20 for all red T-shirts” and prices are automatically posted for all sizes.

Jung Sanchez also praises Blue Martini’s data-mining capabilities. When shoppers register at Gymboree.com they will be asked several questions-age, number of children, gender of children and whether they’re a working parent or stay-at-home mom or dad. By sifting through that information, Gymboree can determine whether certain items sell better to certain shoppers.

The registry information, when combined with purchasing data and browsing patterns, enables Gymboree to create personalized Web sites for each customer.

This August, Blue Martini updated the E-Merchandising System to enrich its features. Among the enhancements, the new version dramatically improves gift registries-along with allowing users to build multiple lists, it lets them identify to whom they want their registries sent. Cross-sell and upsell recommendations previously limited to one item now can be expanded to several suggestions. And promotions can be based on various criteria-what’s in the customer’s shopping basket or the order amount-rather than a specific product.

A competitive threat

E-Merchandising’s updated version, which starts selling for $650,000, adds a fail-over feature. If one Web store server fails, the software allows another to take its place. Says Evans: “The chances of a customer’s shopping session being interrupted are virtually nil.”

David Baltaxe, an analyst at Current Analysis in Sterling, Va., calls Blue Martini’s latest release a competitive threat to vendors such as InterWorld and BroadVision. Though BroadVision’s software leans toward personalization and InterWorld’s toward process, he adds, “Blue Martini ties itself tightly to merchandising.”

Other developers provide personalization features by allowing retailers to profile users and content, but Blue Martini goes a step further. Product profiles can be separated from supporting content, meaning that the same product can be presented in a different context to different customers.

A sporting goods retailer, for example, might choose to romance its ski merchandise with a travel article. For Baby Boomers with children, that article might focus on family-oriented lodgings. For college students, it might deal with trendy nightlife spots.

Another feature of version 2.0 is improved click stream analysis, allowing retailers not only to track purchases, but study what the shopper has viewed. “You’re trying to understand what they didn’t buy,” says Evans, “so you can persuade them to buy the next time.”

Though Blue Martini’s first clients dealt mainly in apparel, new accounts include Harley Davidson as well as iFlourish.com, a site selling lifestyle products to the over-45 crowd and Gloss.com, a retailer of cosmetics and fragrances.

On the funding front, Blue Martini raised $12.5 million in financing this fall, led by U.S. Venture Partners. That’s on the heels of $5 million from Matrix Partners last March. The company plans to use the new funding to scale up customer support services and build its sales organization.

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