In its second-largest acquisition, Amazon buys the company for $970 million.
The lightning pace of e-commerce business developments is forcing retailers of all types to hit moving targets at budget time
It’s the annual budget meeting at “e-retailer” WidgetsForAllOccasions.com, and every department from I.T. to fulfillment to marketing is targeting the same pool of resources with its own wish list. The risks of the budgeting decisions to be made are many: Spend too much on a program and WidgetsForAllOccasions.com could starve another area of business in need of attention. Spend too little and opportunities could pass it by. Spend on the wrong thing and the fictional e-retailer could be nailed by both scenarios.
When everyone has his or her hand up for funding, just how do e-retailers decide where to invest and when to hold off on spending? Industry veterans may remember the story of Boo.com, the fashion site whose tail as a cautionary tale is longer than its 18-month life as an online retailer. Caught up in the frenzy of the dot-com boom of the late ‘90s, it spent
hundreds of millions in venture capital money on advertising, marketing, and site bells and whistles, chasing sales that never materialized. It crashed and burned in 2001.
It’s an extreme case, but it does illustrate one budgeting strategy that’s been used with more success by other e-retailers: spend upfront to bring sales in and figure the revenue will follow. Amazon.com is a poster child of sorts for this approach, continually breaking ground with new features, functions and marketing programs. No one can deny Amazon.com has become an online sales powerhouse: at $8.5 billion last year, it’s No. 1 in the Internet Retailer Top 500 Guide. But all of that build-out comes at a cost, which leaves the company struggling to grow profits commensurate with its gargantuan sales.
Borrow and spend big upfront to reel in sales or fund growth out of profits as they are realized is but one decision e-retailers face when setting a budget strategy. And once a strategy has been formed and put in place, e-retailers at budget time still face the competing in-house resource demands of any other business. But there’s an industry-specific twist: technology, opportunities and the need to correct a faltering course all come around at a faster pace than in the offline world.
“Online retail’s a pretty dynamic place-you’ve got to be able to react,” says Darryl Cavens, vice president of marketing at online jeweler BlueNile.com. “Even a one-year budget can be a long timeframe.”
Because of that, e-retailers deciding where to invest and how to allocate funds may have to make decisions with less information than typically supports such decisions in offline businesses, says Susan Aldrich, senior vice president at research and consulting firm Patricia Seybold Group. “Less longevity, less track record, less information of any kind,” Aldrich says. “We all want ROI. But ROI is really expensive to figure out, even for what we already have, let alone what’s new.”
Cash flow strategy
The overarching budget strategy at Replacements Ltd. guides spending on operations at the web site the company launched in 1993. Replacements, a retailer of china, crystal and flatware, has funded its development into a $75 million company, including its web operation, out of its own cash flow. That’s at the directive of founder and CEO Bob Page, by profession a CPA, who started the company as a hobby business some 25 years ago.
Though the web site is now responsible for about 65% of the company’s sales, it doesn’t get a commensurate proportion of resources at budget time. The biggest chunk, about 50%, must go to operations, because Replacements’ fragile inventory-all 1.3 million SKUs-must be handled by hand rather than automated systems, meaning that about half of the company’s 500-plus workforce is in its warehouse.
Given heavy demands on the budget by operations on the one hand and the directive not to borrow money on the other, Replacements has to be creative with what’s left in order to get everything done on its web site. And that’s sparked some original thinking that might not otherwise have surfaced, vice president of e-commerce Jack Whitley says.
For example, though Replacements has more than 1 million SKUs, only about 10% of them are popular and sell regularly. With a low conversion rate for the larger part of its inventory, presenting photos of the entire catalog online became expensive as traffic scaled up to the current 25 million pages served per month. “So we’ve always looked for a way to do that technically in the most cost-effective way. And that fit in with Bob’s requirement that we not borrow to build out our infrastructure before sales came along. It has to support itself,” Whitley says.
To resolve that issue affordably, Replacements found a way to tap the same internal database its call center agents use to create product pages for the web site. Some 300,000 inventory pages representing all of Replacements’ stock are drawn out of the internal database in a batched process each night, providing a near real-time inventory display for the web site. “We didn’t have to invest millions in infrastructure to host the application servers needed for 2.5 million visitors a month,” Whitley says.
With operational needs a given and some cost-saving innovation in web infrastructure, there’s enough money to fund online marketing and stay within the company’s self-funding mandate. Based on history, Replacements now can predict with fair accuracy that if it spends a designated amount of money in online marketing it will bring in a predictable number of customers, of which a predictable percentage will convert.