Online and in the Black

Coincidentally, Johnson’s friend had developed shopping cart technology. He was looking for someone to try it out at no cost—Johnson obliged. His business partner bought the book “FrontPage for Dummies” and the two began designing Underneath.com’s online store. Johnson also began heading to industry conventions to convince major undergarment manufacturers that it made sense to sell on the web. “We were the only site selling this at the time; we were a test for our vendors,” Johnson says. “They were afraid, but, one by one, we convinced them to do it.” Today, Underneath.com sells products from 30 vendors; brand names on the site include Jockey, Joe Boxer, Bali, and others. Inventory runs to approximately 2,000 SKUs; employees run to six.

However, Johnson’s attempts to secure venture capital for Underneath.com have come up empty. “Intimate apparel is not something people get excited about,” he says. The company’s start-up funding consisted of $48,000 that Johnson ran up on his credit cards. He since has been able to repay himself in monthly installments of $3,500. Not surprisingly, Johnson has worked hard to hold down costs. “We have to spend our dollars wisely,” he says. For instance, Underneath.com has done little advertising. Instead, Johnson uses lower-cost marketing opportunities, such as search engines.

Those search-engine smarts have paid off. About 60% of Underneath.com’s sales are a result of someone coming through a search engine. The rest are generated by a mix of publicity, word of mouth, repeat orders and an affiliate-marketing program. More than 12,000 other web sites include links to Underneath.com through affiliate program. They generate about 15% of sales. Affiliates receive an 8-12% commission for each referred visitor who makes a purchase.

Underneath.com gets as many as 10,000 unique visitors each day, and about 1% make a purchase. The average order size is about $50. While Johnson won’t disclose precise revenue and net profits, he says sales will far exceed $1 million this year. “We’re operating above water,” says Johnson, adding that by reinvesting profits, the site continues to add lines and styles each month.

Underneath.com has one retail store in Atlanta. The store is in a strip mall that had been converted from an industrial building, so it also houses Underneath.com’s warehouse. Revenue from the store pays the rent for the location, says Johnson. Some argue that pure-play retailers, like Underneath.com, must beef up their offline presence to entrench themselves in consumers’ minds. Multi-channel retailers have several compelling advantages. “They don’t need to start from scratch,” says PricewaterhouseCoopers’ Wissman. “They can leverage existing assets and knowledge base; they know their customers, and have their supply chains intact.”

Pure-play retailers do have some advantages, says Boston Consulting’s Vogtle. They’re able to innovate and change course quickly—critical for the fast-paced Internet economy. They also thoroughly understand the online shopping experience, he says.

One key to a successful pure-play site is its ability to offer unique products or information that customers would have a difficult time finding elsewhere, says Vogtle. That has been the experience of Louis Silberman, chief executive officer with Health4her.com, a Scottsdale, Ariz.-based merchant of vitamins and health and beauty products for women. This year, the site should ring up about $3 million in sales, with a net profit margin of about 10%, says Silberman.

That’s a switch from just a short while ago. Health4her.com didn’t ring up a single sale for six months after it opened for business in February 1998. “It was frustrating,” Silberman says. “We blew through $80,000 of personal savings.”

A deliberate decision to shift to unique products and information saved the company. The dramatic shift in merchandising and marketing was the brainchild of Shelley Silberman, Louis’s wife and head of product development. The site previously was called HealthFactor.com and sold everything, says Silberman, including vitamins, gingko biloba leaf herb and other supplements.

Today, Health4her.com sells nutritional supplements and health and beauty products specifically for women. What’s more, they’re not just any products, says Silberman. “We said ‘forget it’ to commodity products,” he asserts. “If you can buy it in a supermarket or a price club, we don’t sell it.”

Instead, Health4her.com concentrates on exotic—or at least hard-to-find—products. One is Vimaca, which it bills as female Viagra. Vimaca is a pill containing maca, a member of the radish family, that is found in the Andes mountains of Peru. Maca has been part of the South American diet for nearly 2,000 years, and has long been considered a way for men and women to enhance their libido, says Silberman. Other products include detoxification systems and weight loss products.

Like Johnson, Silberman relies on search engines, rather than expensive advertising campaigns, to generate traffic. As a result, he tailors the site’s content to reflect the way in which most people search the web. “People go for information on problems, not products. From there, they progress to the products,” contends Silberman. Thus, rather than simply present facts about Vimaca, Health4her.com will develop a page with information on libido issues and products. While Silberman doesn’t calculate the cost of acquiring customers, he notes that the company’s $70,000 a month operating expenses divided by 3,000 new customers a month means the cost of a new customer is $23.50, taking into account all expenses. By contrast, the average cost to an online retailer of acquiring a new customer is $82, according to the Shop.org/Boston Consulting Group.

Even that would dwarf the employee roster at 2CoolTek.com. Ian Felts started the online retailer of computer products in February last year; the staff consists of just Felts and his wife, Georgia. The Satellite Beach, Fla.-based company sells cooling equipment for computers; computer enthusiasts make up the bulk of its market.

Felts didn’t actually plan to go into business for himself. He simply grew frustrated at the difficulty he had trying to purchase computer supplies online. Many products were hard to find, and even when the equipment was available, it could take months to get. “I figured any trained ape could do a better job,” says Felts.

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Felts’s business appears to be doing well. For this year, Felts estimates that sales will be about $750,000, with an average order size of about $30. Of that, 10-15% will drop to the bottom line, he says.

In contrast to Silberman and Johnson, Felts doesn’t even try to get on the search engines. “They’re so over-rated, they’re not worthwhile,” he says. “You can’t keep yourself close enough to the top to make it worthwhile.” Instead, Felts uses old-fashioned word of mouth, albeit with an Internet-era twist, to drive traffic. He regularly sends review pieces of new equipment to online sites such as Tweaktown.com that review computer hardware; they’ll use the equipment and write up their opinions on it.

Felts also regularly heads to the message boards on those sites. Should someone post a question about cooling, he’ll try to answer it, without making a pitch for the products he’s selling. “I just send information, and if people happen to link back to me, that’s where business comes from,” he says.

Getting 2CoolTek.com up and running didn’t cost much at all. Felts taught himself to write code, and put the site together himself. Once 2CoolTek.com was in operation, Felts managed it part time, while he kept his day job as a staff sergeant in the U. S. Air Force. This April he finally quit the Air Force to devote full time to 2CoolTek.

2CoolTek uses the shopping cart technology of Freemerchant.com, an e-commerce platform. As the name suggests, Felts doesn’t pay anything for the service; Freemerchant makes money from partnerships with companies that provide services to 2CoolTek and the other small businesses that use Freemerchant. He uses HyperMart to host the 2CoolTek home page at a cost of $10 per month.

While Johnson, Silberman and Felts all sound satisfied with the progress their sites have made, none is ruling out joining forces with another company, or selling altogether. Johnson, for instance, notes that Underneath.com is constrained by its limited capital.

“We want to grow faster than what the business can do,” he says. “We’re not scalable. We couldn’t support 10,000 orders per day if we got them.”

Johnson’s comment brings up what may be the biggest threat facing profitable niche players: many don’t have the resources to significantly scale up without taking on a partner. This is critical, says Vogtle. In addition to unique products, niche players that plan to stay around for a while need the capacity to grow and handle larger volumes of business. Both Johnson and Silberman, for instance, have talked with potential investors and partners.

Still, the fact that these retailers have done as well as they have so far shows that solid business practices and strategies—finding a unique market, knowing one’s customers and developing innovative ways to stretch a budget—are as applicable on the web as they are off.

A competitor to Underneath.com, complete with a reportedly high-priced management team and venture funding, sprang up in Atlanta—Underneath’s own backyard. The company spent itself out of existence, and eventually was sold, says Johnson.

Karen Kroll is a Minnesota-based freelance business writer.

E-retailers sharpening focus