In its second-largest acquisition, Amazon buys the company for $970 million.
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Underneath.com has one retail store in Atlanta. The store is in a strip mall that had been converted from an industrial building, so it also houses Underneath.com’s warehouse. Revenue from the store pays the rent for the location, says Johnson. Some argue that pure-play retailers, like Underneath.com, must beef up their offline presence to entrench themselves in consumers’ minds. Multi-channel retailers have several compelling advantages. “They don’t need to start from scratch,” says PricewaterhouseCoopers’ Wissman. “They can leverage existing assets and knowledge base; they know their customers, and have their supply chains intact.”
The pure-play advantage
In fact, the Shop.org/Boston Consulting Group report found that catalog-based, multi-channel retailers operating online were the most likely to have a profitable e-commerce site; 72% were in the black at the operating profit line. The reasons? They’re familiar with the direct marketing nature of the web and can leverage their existing warehouses, fulfillment systems and customer service functions. What’s more, they can steer existing customers online by placing their URLs on their catalogs.
Pure-play retailers do have some advantages, says Boston Consulting’s Vogtle. They’re able to innovate and change course quickly-critical for the fast-paced Internet economy. They also thoroughly understand the online shopping experience, he says.
One key to a successful pure-play site is its ability to offer unique products or information that customers would have a difficult time finding elsewhere, says Vogtle. That has been the experience of Louis Silberman, chief executive officer with Health4her.com, a Scottsdale, Ariz.-based merchant of vitamins and health and beauty products for women. This year, the site should ring up about $3 million in sales, with a net profit margin of about 10%, says Silberman.
That’s a switch from just a short while ago. Health4her.com didn’t ring up a single sale for six months after it opened for business in February 1998. “It was frustrating,” Silberman says. “We blew through $80,000 of personal savings.”
A deliberate decision to shift to unique products and information saved the company. The dramatic shift in merchandising and marketing was the brainchild of Shelley Silberman, Louis’s wife and head of product development. The site previously was called HealthFactor.com and sold everything, says Silberman, including vitamins, gingko biloba leaf herb and other supplements.
Today, Health4her.com sells nutritional supplements and health and beauty products specifically for women. What’s more, they’re not just any products, says Silberman. “We said ‘forget it’ to commodity products,” he asserts. “If you can buy it in a supermarket or a price club, we don’t sell it.”
Instead, Health4her.com concentrates on exotic-or at least hard-to-find-products. One is Vimaca, which it bills as female Viagra. Vimaca is a pill containing maca, a member of the radish family, that is found in the Andes mountains of Peru. Maca has been part of the South American diet for nearly 2,000 years, and has long been considered a way for men and women to enhance their libido, says Silberman. Other products include detoxification systems and weight loss products.
Like Johnson, Silberman relies on search engines, rather than expensive advertising campaigns, to generate traffic. As a result, he tailors the site’s content to reflect the way in which most people search the web. “People go for information on problems, not products. From there, they progress to the products,” contends Silberman. Thus, rather than simply present facts about Vimaca, Health4her.com will develop a page with information on libido issues and products. While Silberman doesn’t calculate the cost of acquiring customers, he notes that the company’s $70,000 a month operating expenses divided by 3,000 new customers a month means the cost of a new customer is $23.50, taking into account all expenses. By contrast, the average cost to an online retailer of acquiring a new customer is $82, according to the Shop.org/Boston Consulting Group.
The new word of mouth
Health4her.com’s penny-pinching goes beyond the marketing budget. Until mid-1999, the company operated out of the Silbermans’ living room. Just a dozen full-timers make up the company.
Even that would dwarf the employee roster at 2CoolTek.com. Ian Felts started the online retailer of computer products in February last year; the staff consists of just Felts and his wife, Georgia. The Satellite Beach, Fla.-based company sells cooling equipment for computers; computer enthusiasts make up the bulk of its market.
Felts didn’t actually plan to go into business for himself. He simply grew frustrated at the difficulty he had trying to purchase computer supplies online. Many products were hard to find, and even when the equipment was available, it could take months to get. “I figured any trained ape could do a better job,” says Felts.
Felts’s business appears to be doing well. For this year, Felts estimates that sales will be about $750,000, with an average order size of about $30. Of that, 10-15% will drop to the bottom line, he says.
In contrast to Silberman and Johnson, Felts doesn’t even try to get on the search engines. “They’re so over-rated, they’re not worthwhile,” he says. “You can’t keep yourself close enough to the top to make it worthwhile.” Instead, Felts uses old-fashioned word of mouth, albeit with an Internet-era twist, to drive traffic. He regularly sends review pieces of new equipment to online sites such as Tweaktown.com that review computer hardware; they’ll use the equipment and write up their opinions on it.
Felts also regularly heads to the message boards on those sites. Should someone post a question about cooling, he’ll try to answer it, without making a pitch for the products he’s selling. “I just send information, and if people happen to link back to me, that’s where business comes from,” he says.
Getting 2CoolTek.com up and running didn’t cost much at all. Felts taught himself to write code, and put the site together himself. Once 2CoolTek.com was in operation, Felts managed it part time, while he kept his day job as a staff sergeant in the U. S. Air Force. This April he finally quit the Air Force to devote full time to 2CoolTek.