Computers / Electronics / CDs / Videos:
Building on a market made for the web

Dell.com
Making a leader more friendly

Sometimes a web site can ride its forte too far. Take Dell Inc., whose philosophy and business model are built on a direct-to-customer strategy. As the standard-setter in selling computers direct to end-users over the Internet as well as through catalogs, it has leaped to the forefront over the past several years as the leader in its market.

But as well as its model has worked, it wasn’t good enough to serve a company with an expanding array of customer segments and geographic markets, says Manish Mehta, director of global e-business. “We had mixed success in terms of user experience. Our focus was a little imbalanced toward technology infrastructure.”

While Dell led the way with product configurators that let shoppers build desktops and laptops by choosing their own mix of power settings and accessories, it offered an overall site experience that didn’t support shopping across multiple categories ranging from consumer desktops and laptops to industrial servers. And with its recent thrust into digital entertainment, it figured it was time to completely redesign its site to support a multi-category shopping experience.

“Dell’s consumer electronics strategy is well-suited to drive incremental sales and order sizes,” says Joe Beaulieu, analyst with investment research firm Morningstar Inc. “There hasn’t been a compelling reason to upgrade to new PCs lately, so the move to digital entertainment should be a way to get people to upgrade with more megahertz and RAM.”

Dell launched a redesigned web site this fall that makes it easier for customers to navigate among different product segments, so that a business owner can research and purchase servers and storage systems, for example, then click to a section for viewing personal or business desktop systems, Mehta says. After researching how customers preferred to use its site, it provided order status links on every page and added more merchandising space by removing a rarely used left navigation bar in favor of a top horizontal bar.

“We now provide greater continuity throughout the site, so it’s easier to navigate and understand,” Mehta says. “The site redesign puts us back in balance with customer shopping needs.”

And keeping balance is crucial for Dell’s strategy of migrating customers toward a wider offering of consumer products, as Dell seeks to make its PCs the center of home digital entertainment systems. The centerpiece of its new push in entertainment is a new multi-function computer monitor that will also serve as a television screen for displaying videos. “This is at the heart of our strategy of turning the PC into the digital hub of home entertainment,” founder and CEO Michael Dell says.

GoodGuys.com
Keeping it simple--and profitable

Walt Mulvey, CEO of GoodGuys.com Inc., makes no pretentions about GoodGuys.com being a flashy place to shop for consumer electronics. He prefers to keep things simple — and profitable, he says.

“Our site is not the prettiest site, but we help customers find products in a hurry, and when customers get to one of our product pages, we make it easy for them to find other products and accessories from the same page,” he says. “I’m not sure what came first, keeping things simple or profitability. By keeping things simple, we’ve been profitable, but because our first requirement is to be profitable, we’ve had to keep it simple.”

Simplicity doesn’t mean lack of shopping options in its niche of electronic entertainment, however. GoodGuys.com sells more than 50 brands, and it serves them up through a variety of ways to shop. And it offers free shipping on everything. “They’re highly focused on entertainment electronics, and their assortment of brands is really appealing,” says Kelly Mooney, president of retail consulting firm Ten/Resource. “That definitely makes them a draw for some people.”

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Among GoodGuys’ fortes, she adds, are several shopping options and customer service features not often found on other sites. One is a clearance area that offers products at up to 40% off but with full warranties; another is the ability to download rebate forms. It also offers extended warranties at 20% discounts. “They offer a number of things that serve as incentives for customers to get engaged,” Mooney says.

So how can GoodGuys.com, which is a separate entity from the Good Guys retail chain, afford such pricing and service and still produce profits? One way, Mulvey says, is that it doesn’t hold its own inventory in warehouses, relying instead on drop shipments from suppliers and products it acquires from the Good Guys retail chain. It also relies entirely on in-house development of site applications.

“We’re lean and mean,” Mulvey says. “We’ve built an infrastructure and developed tools that allow us to check profitability.”

For example, he adds, GoodGuys has arranged its product databases to let it quickly change the way its site’s searchable words relate to its product descriptions. “If we see someone searching on a word that we haven’t linked to the product they eventually find, we’ll link it right away,” Mulvey says.

His development team has also arranged the site so that products in any SKU are never more than three clicks away. “Our look-to-buy ratio is very high,” Mulvey says.

Apple.com/iTunes
Tuning in to a trend to build market

Apple Computer Inc.’s iTunes has hit the music scene like the latest rock star, with more than 17 million digital songs downloaded from the iTunes Music Store at Apple.com/iTunes since its April launch. ITunes was one of the first viable demonstrations that a significant number of consumers will pay for music online. So the market can’t blame Apple CEO Steve Jobs for a self-congratulatory remark after a recent iTunes milestone, which he described as “historic for the music industry, musicians and music lovers everywhere.”

But Apple’s road toward long-term growth and profits in the fledgling market for legitimate distribution of digital music won’t be easy, analysts say. It already faces a slew of competitors from the likes of Roxio Inc.’s Napster 2, RealOne Rhapsody, Buy.com’s BuyMusic.com, eMusic and MusicMatch. Dell Inc. is marketing its own Dell Digital Jukebox software and devices for downloading music from Dell.com.

Still, iTunes has made its mark in ways that no one else can, and Apple stands to reap big gains from iTunes in more than just digital music sales, says Joe Beaulieu, an analyst with investment research firm Morningstar Inc. “ITunes is a very effective branding campaign for Apple,” he says.

Apple offers its iTunes software for free to entice users to pay 99 cents per song. But with margins slim at that price, particularly with the cost of running servers to support music downloads, Apple will be looking for wider margins on sales of its $300 handheld iPods as well as desktops that can play digital music, Beaulieu says.

But Apple has a broader coup in the works. Its successful recent launch of a Windows PC version of iTunes gives it the advantage of serving both Mac and PC owners. “I was concerned that someone else would get into the digital music market for PCs ahead of them, but they managed to pull out the first viable online music store for the PC,” Beaulieu says. “When they came out with the PC version, they captured the look and feel of the Mac version very well.”

Indeed, he figures the most important aspect of the digital music business for Apple will be the new business it will bring for its broader line of computers and peripherals. “Apple will make money on iTunes, but not as much as it will make on hardware sales by using iTunes to get more young people thinking about Macs,” Beaulieu says.

And now that the latest versions of Mac desktops and laptops are easily networked with PCs, he adds, Apple should find it easier than ever to woo iTunes PC users with offers of new Macs. m

MusiciansFriend.com
Harmonizing with its musical clientele

Selling over the Internet to a niche customer base is a lot different from selling to a mass audience. But few web sites do it better than MusiciansFriend.com.

Since only one in 10 Americans even plays a musical instrument, MusiciansFriend knows that few web shoppers are likely to even look at the musical instruments and related accessories that it sells. Therefore, it has focused everything in its site—from the editorial content to the product selection—squarely on meeting the needs of those who do play.

But MusiciansFriend’s niche is still quite wide as it sells to a range of music lovers—from young students just learning an instrument to professionals. To meet those needs, it offers more than 36,000 products. “The products and services are geared to all levels,” says Rob Gallo, consultant with Retail Forward Inc. “They have a clearance center for budget-conscious consumers just learning to play as well as a top-quality section for serious musicians. Also, the advice columns and editorial content cater to musicians of all ranges.”

In addition to a broad selection, MusiciansFriend lives up to its name by providing strong editorial content that attracts musicians (read “potential buyers”) to the site, Gallo says. “They offer a lot of good advice, such as improving your sound or how to get copyrighted,” he says. “They want to be viewed as a central source of products and information for the music industry.”

Also important to attracting customers is the use of search engines. “We can’t do mass advertising like a lot of retailers do and make it work,” says Eric Meadows, Internet director. “Before, we mostly advertised in trade magazines, but a lot of people don’t read them. Now, we identify keywords with search engines and that drives a lot of traffic to our site.” MusiciansFriend.com also has links to 30,000 music-related affiliates.

Selling musical instruments online has its unique challenges. Many serious and professional musicians like to try out instruments before buying. MusiciansFriend.com relieves some of that concern with a policy that allows returns up to 45 days. “Guitar players especially get involved with their instruments. We need to remove all fear from purchasing instruments online,” Meadows says.

But not all musicians are fearful of buying sight unseen. “A lot of musicians are on the road and can’t always get to a store when they need something,” Gallo says. “Most know exactly what they want and are very brand conscious. Also, serious musicians in small towns often find local stores don’t offer much of a selection and they like the selection MusiciansFriend offers.”

Netflix.com
Seeing the big picture

Netflix Inc. is a darling of Wall Street, with a stock price that has surged 500% in the past year to the mid-50s on top of an expanding base of customers for its online DVD rental service. But CEO and founder Reed Hastings compares it to the early Windows computer operating software—better than its DOS predecessor, but still far from its potential. “A lot of Internet retailers, even the great ones, are still learning how to use the medium, how to merchandise through a small computer window,” he says. “But it will take us another 10 years to get as good as we want in Internet merchandising.”

Nonetheless, Netflix.com continues to make impressive strides in perfecting the market for online rentals of DVDs. Its patented method of distributing DVDs—under which customers pay $19.95 a month to receive an unlimited number of DVDs—is designed to maximize service while minimizing costs. After customers select a large group of movie titles they’d like to view, Netflix randomly picks each month’s selections from the DVDs that are available on the customer’s list.

In the face of competition from the likes of Wal-Mart and Blockbuster, Netflix is trying to do even better. It has improved site navigation by reworking HTML coding, providing for faster page downloads. “By speeding up our site, we increased the overall satisfaction of customers,” Hastings says. The result: In the third quarter, Netfllix reduced customer churn to 5.2% from 7.2% a year earlier, as its customer base grew 74% from a year ago to 1.3 million. Q3 revenue hit $72 million, up 77% year-over-year, and net income reached $3.3 million, the third straight quarterly profit. Part of Netflix’s success comes from real-world logistics, though, and not just from a great web experience. An expansion to 20 distribution centers this year has put more customers within easy overnight deliveries.

Kathryn Cullen, principal of retail consultants Kurt Salmon Associates, says Netflix excels in offering a simple way of getting movies that appeals to a growing number of consumers. “Families with young children love it because parents can’t always get to the video store and they never know when they’ll have time to watch a movie,” she says.

But Hastings plans to provide even better service. He looks forward to the development of broadband enabling Netflix to distribute movies through the web, saving on operating costs while raising customer service. “We named the company Netflix and not DVD by Mail because we’ll offer the option of downloading or mailing movies,” he says. “We eagerly await the day the web delivers movies.”