March 28, 2001, 12:00 AM

The School of Hard Knocks

(Page 2 of 3)

GoodHome had originally spun off from software developer Broderbund, bringing with it the imaging software it soon realized was its prize asset. “Other companies asked if we’d ever consider licensing our technology and the light bulb went on,” says Doug Mack, CEO of both Scene7 and GoodHome.com. “We saw we could get profitable far faster as a technology company than as an online furniture retailer.” Mack and his team started incubating Scene7 within GoodHome.com in June 1999, signing up 10 technology clients ranging from Victoria’s Secret to Minolta by the time the web furniture store closed seven months later. “In the current market you have to make a bet,” he says. “We were certain that technology would be our long term survival and the better path to win.”

 

So far, the bet seems to be paying off. Private Scene7 doesn’t share financial data, but Mack offers this much: the monthly seven-figure cashburn rate at GoodHome.com has slowed to six figures at Scene7, and profits, doubtful at GoodHome.com before 2003, are on the radar screen at Scene7 for spring of 2002.

 

 

Pinch that penny

 

 

When the company is founded with your own money, every penny that goes out the door gets scrutinized and thrifty habits become corporate culture. It’s a trait that’s come in especially handy for many an e-retailer since venture capital funding dried up, including Greenwood Village, Colo.-based eBags.

 

“For the first 11 months, we used our own money, and building a site like ours costs more than $1 million,” says Peter Cobb, vice president of marketing and one of four ex-Samsonite executives who founded eBags. “Everything we spent was by writing a check, using one of our Visa cards, or by taking out mortgages on our homes, so it’s easy to stop and ask if this is the right thing to do.”

 

Frugality has been the mantra at 2-year-old eBags, which recently shipped its 1 millionth bag and which is aiming for profits by the end of this year or the first half of 2002. To get there, the company stays lean, trimming staff by 22 late last year and dropping its New York public relations agency to take duties in-house. It’s passed on major portal deals in favor of less-expensive placements on the big three-AOL, Yahoo! and MSN-and tested but passed on major market TV, radio and newspaper advertising. Instead, it’s put its marketing emphasis on the medium where it lives: the Internet. Besides the portals, it has 25,000 affiliates and partnerships with about half a dozen sites.

 

True to form, it does it all as inexpensively as possible. “Virtually all of our online placements are performance-based,” Cobb says. Under that umbrella, eBags is pursuing more partnerships of the type it recently signed with United networks, Untied Airline’s e-commerce division and operator of the UAL web site. The partnership set up a store at United.ebags.com, a click away from UAL’s home page. Mileage Plus members get miles for purchases and United gets a percentage of each sale. The cost to eBags is nothing, expect for technology set-up costs.

 

Given its careful spending, what does get eBags to open its wallet? “We have three things we’re after,” Cobb says. “To drive traffic, increase conversions and build our data base.” That means about 70% of its marketing budget goes to support its various online marketing agreements, and an additional chunk-about 15%-goes to support e-mail campaigns. A current sweepstakes promotion is a million-mile giveaway to those who register. The air miles cost eBags in the tens of thousands of dollars, but Cobb says it’s worth it: in the first 45 day of that promotion, 150,000 site visitors had provided e-mail addresses by registering to win, and about 80% of the names were new to the site.

 

Sales at eBags are projected to edge toward $20 million this year, reflecting growth of about 50% over last year, and conversion rates have doubled from last year, Cobb says-and all on a marketing budget reduced from last year by about two-thirds.

 

 

Niche play

 

 

Sites like Cooking.com are betting success on their ability to zero in on and dominate a narrowly defined category not broad enough to attract a lot of competition.

 

“They have a chance where there’s not such mass-market appeal that bigger competitors will pounce on that market right away because there’s a big opportunity,” says analyst Paul Ritter of the Boston-based Yankee Group.

 

New York-based UncommonGoods.com (see “Ex-Wall Street Analyst meets artists, together they craft an uncommon e-retail site,” page 14) is following a niche strategy, but instead of moving into one already defined, it’s created one for itself. Less than a year after its launch, the online seller of home accents and gifts is predicting profits by the end of next year. Its identified market is shoppers who favor the high-end yet offbeat items available in high-end regional craft fairs or local boutiques.

 

Assembling an inventory from far-flung quarters is accordingly one the company’s biggest challenges. UncommonGoods has extended its outreach to suppliers cost-effectively with a unique scouts program in which selected shoppers comb their local regions for merchandise suggestions for the site. The scouts collect a percentage on items selected for and sold on the web site.

 

 

Redefining retail

 

 

Even the CEO of St. Paul, Minn.-based Bellacor.com, a home furnishings web site that launched last year, isn’t sure whether to call his company a retailer, a wholesaler, or a manufactures’ representative. But figuring out what to label the business model is less important than the numbers it’s generating. Bellacor is heading into its second year of operation with annualized revenues of $3 million to $5 million, and the expectation of profitability in its fourth quarter.

 

Pretty good, considering what happened to Furniture.com, Living.com, and a whole bunch of home furnishings sites that are no more. Jan Andersen, CEO, credits the business model with the company’s success. “Just putting a store online doesn’t cut it,” he says. “If you look at most of the failures, you could see that what you could do there was essentially no different from what you could do at a store except that you did it online. We changed that dynamic.”

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