In its second-largest acquisition, Amazon buys the company for $970 million.
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But what about the new ad venues with which it has no track record to make a forecast? The lightning-like pace of business developments in the e-commerce world means retailers who insist on full data before budgeting for something new may lose out. So Replacements takes a different approach. “We allocate monies at budget time for testing, and it’s not expensive. The beauty of the web is that you get rich feedback that tracks back into our internal systems, so we can test six to 10 new venues at a nominal cost,” Whitley explains. “We can see on a daily basis what ROI is. If it’s positive, we’ll spend unbudgeted money there because the sales are coming in ahead of budget as well.”
While Replacements has figured out how to get photos of all of its patterns and most of its inventory up relatively inexpensively, so far it has just said no to spending on popular rich media functionality that would, for example, enable customers to rotate online views of individual pieces. For one thing, that would require additional photos of a huge number of SKUs, a large cost in itself. For another, most of its customers already know what the china or flatware piece they are seeking looks like. “An application like that is nice and one day we will probably have it. But for the bulk of our sales, people don’t need to be able to spin the plate around for us to make the sale,” Whitley says.
He adds that Replacements’ self-funded budget strategy isn’t for every retailer, though it’s been right for Replacements If Replacements were willing to sacrifice profits for a time in the name of spending more to acquire more customers and sales, revenue could be higher than it is, he says. “But then we’d run into the issue of bearing more operational cost and having lower margins,” he says. “That’s not a strategy for our particular market niche that we’d want to try. We’re fairly profitable every year, and growing profits.”
Crank up the risk
Other online retailers crank a higher degree of calculated risk into budget allocation and growth strategy. But those budgeting decisions still live within a top-down corporate mandate. At BlueNile.com, that starts with a narrow focus on what the company is about.
“We want to be the best at diamonds. We don’t spend much time looking at strategic alternatives outside that area,” Cavens says. “Within that area we evaluate things as they come up and try to understand how they will affect our existing budget forecast.” Another driver of budgeting decisions is a corporate culture of frugality, learned as a survivor of the dot-com investment crash, Cavens adds.
So what does Blue Nile choose to spend on? As an Internet-only company, investment in the customer interface gets a high priority. The filter it applies to spending within that area is the degree to which a proposed expenditure would benefit customers directly, versus what would simply be cool to see on the site. Under that rationale, Blue Nile has spent to build the interactive diamond search functionality on its site into an industry-leading search tool while bypassing some features and functionalities found on other sites, according to Cavens. For similar reasons, on the back end a new phone switch at its call center likely will get funded this year after being in line for an upgrade for three years-if the company calculates the payback will be measurable improvement in the customer experience.
In e-retail it’s not uncommon for budget time to set up a conflict between investing in something fun and flashy vs. critical underpinnings deep in operations. “We see a lot of retailers going after things like online video or celebrity items. They may be fun and exciting, and we’d love to do them, but we don’t think they’d work for us. We don’t think they’d have the payback, for instance, that a new phone system would,” Cavens says.
To get at an ROI projection on any budget allocation it’s considering-not just marketing-Blue Nile assigns a dollar valuation; for example, exactly how much more efficient fulfillment would be with a new conveyor belt, or how much more revenue would be driven by improving customer service with the new phone switch at the call center.
Marketing to acquire customers and grow the business gets the biggest chunk of spending, with the target for the past several years set at about 4% of sales. That includes funds in the budget for testing what it deems its best new opportunities so as to be able to move on them speedily if need be. One example is Blue Nile’s recent move into international markets, with dedicated web sites now in the United Kingdom and Canada. The initial investment in the sites, though based on less research than it might have pursued in an offline environment, was a bet by Blue Nile that in view of how quickly a market can move online, the time to act was now vs. later.
The sites don’t yet replicate all the functionality on the U.S. site-for instance, sales are transacted in U.S. dollars rather than local currency. But now that Blue Nile has tested the market and satisfied itself that the demand is there, further investment in those sites will follow.
“We felt it was more important to get out there now, and then learn and adapt to those markets. A different alternative could have been to do a year of research, open a facility over there, put a marketing team and a customer service team in place there, and hope that the demand came. We took the other way,” Cavens says.
Platform pays off
Mike Golden knows a thing or two about building fast growth by creating one robust platform then using it as a base to launch multiple online properties. It’s a model that worked for outsourced e-commerce provider GSI Commerce Inc., which Golden co-founded as Global Sports Inc. and where he served as chief operating officer earlier in his career. And it’s a model that underlies budget allocation and spending at Home Décor Products Inc., where he’s been CEO since 2003. The company’s initial offering, home product site HomeClick.com, has been joined by niche sites AbsoluteHome.com, Barbecues.com, KnobsAndThings.com, Hechinger.com and PoolClick.com.