May 2, 2005, 12:00 AM

Winning Strategy

Newegg has quietly climbed the charts appealing to DIYers

There aren`t many online retailers that wax poetic about their customers, but at Newegg.com, a retailer of computer equipment and consumer electronics, they are viewed as members of a close-knit community. Indeed, Howard Tong, vice president of marketing, credits the company`s success to the "love and support" of its customers.

That love affair began in 2001 when Newegg launched a web site to meet the demands of technologically sophisticated consumers seeking computer components. "When we started out, we really felt like we had a cult following. It was these enthusiasts, these tech people who didn`t have a web site or a home to go to to purchase products to sustain their digital lifestyles," he says.

An online community

Newegg became that home and even today, when there are plenty of other tech web sites, has developed a bond with its customers that extends beyond the site, Tong says. In fact, customers are so rabid, Newegg.com posts 615 pages of customer testimonials on its web site. "When you go to the forums, the different tech sites, people are talking about Newegg and about the specials and deals we have," he says. "It`s an online community."

That avid following helped Newegg sustain close to 100% year-over-year growth between its launch and 2004. Tong reports that sales at the privately held company broke through the $1 billion mark last year and are expected to increase to at least $1.4 billion this year.

Newegg.com focuses its product line on three areas: computers and computer-related products, including hardware, software, parts and cards; consumer electronics, including MP3 players and digital cameras; and communications, including networking and wireless products.

The retailer serves more than 3 million established customers who on average buy three to five items and spend about $300 each time they make a purchase, according to Tong. It is among the 500 most-visited web sites in the world. And with its doubling of sales last year, it ranks among the 10 largest online retailers, according to the forthcoming Internet Retailer Top 400 Guide to Online Retailers.

A basic tenet

Newegg.com on average has about 400,000 site visitors a day. Its conversion rates range from 6% to a little over 7%, Tong says.

Newegg.com`s success illustrates a basic tenet of online retailing: identify a customer base and stay true in marketing to that base, says Patricia Freeman Evans, retail analyst at Jupiter Research. "They`re missing a big component of the consumer base, but that`s okay," she says. "Tiffany doesn`t go after every customer either."

Newegg spent little on advertising when it launched the site, Tong says. "When we started, most of the marketing was word of mouth," he says. "Our philosophy is if you have a good product, it will spread. Once people find out they have a great experience, they`ll go out and tell other people about it."

Today, Newegg.com uses a wide range of marketing vehicles, both online and offline, although ad spending still is minimal. Newegg`s marketing spend has always been under 1.5% of revenues. "We spent approximately $14 million in 2004 and we plan to spend about $21 million in 2005," he says. Newegg expects to spend 1.5% of revenue on marketing this year.

Offline, the site advertises in more than 35 publications, including Business 2.0, Computer Gaming World, and Computer Shopper. It also uses billboards and radio advertising.

Online, Newegg.com employs comparison shopping sites, such as Bizate/Shopzilla, Pricegrabber.com, Pricewatch and Shopping.com, to attract customers. It also uses more than 20 keyword search engines, including Google, Yahoo Search Marketing (formerly Overture), Industry Brains and Kanoodle. And it runs banner advertising and messaging across 50 web sites.

Filling a need

The idea for Newegg emerged from requests from customers of New-egg`s affiliate, a mail-order operation and PC system integrator. "We started to get a lot of requests from our customers saying, `I don`t need a whole new PC` or `I just want to upgrade my computer--maybe more memory or a video card. Can you help us?`" Tong says. "Our answer then was `We really can`t.` But we recognized it was a growing market that no one was really addressing."

Tong describes Newegg`s core customers as do-it-yourselfers. "It`s the person who is not afraid to crack the case of his computer or build his computer from the ground up," he says. That group includes gamers, tech enthusiasts, information technology professionals, and so-called gadget people.

Customers also include people with what Tong terms digital lifestyles, typically young consumers who are heavily into digital cameras, PDAs, and other digital devices. "Fifty percent of our customer base is between 18 and 30," he says.

And when these youthful customers grow up, leave school and move into the workplace, they take their loyalty to Newegg with them. That has opened new markets for the retailer. "When they need something for their office or work environment, they buy from Newegg.com," Tong says. Newegg has used this channel to move into sales to home offices and small to medium-size offices, he says.

Self-support

Because of the unique nature of its customer base, Newegg takes a different approach to technical support staff--it has none. "We realized that our customer base is a lot more savvy on the technical issues," Tong says. "We felt we couldn`t do it as well as our customers could, so we allowed them to take care of each other."

That support takes the form of everything from instructions for assembling a piece of equipment to troubleshooting, Tong says. Customers also can research different products by accessing more than 136,000 reviews posted on the Newegg site.

Customer service is an entirely different matter. Newegg employs a staff of more than 100 customer service representatives who can do such things as waive fees or send out replacement parts to unhappy customers without consulting a supervisor, Tong says. "They have a lot of flexibility to make the customer happy," he says.

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