The School of Hard Knocks
The market has toppled many pure-plays, but some are finding ways to keep their balance
By Mary Wagner
A year ago, when friends asked Paul Gilbert why he would leave a perfectly good brand manager’s job to join an unproven Internet start-up called JustBalls, he’d give the answer that still puts a gleam of excitement in his eye today. “There was an enormous amount of economic experimentation going on around the web,” recalls the vice president of marketing at the Princeton, N.J,.-based JustBalls, a seller of—well, you can probably guess what. “Here’s the web, this fundamentally new tool, and it’s so far unclear whether it’s a disruptive technology, a complementary one, whether it’s a communication or commerce vehicle. What is this thing?”
Good questions, and ones that e-retailers have spent millions trying to answer. The roadside is by now littered with defunct retail web ventures that guessed wrong or just ran out of money and time. The fast lane to e-retail success is filling up with traditional retailers and catalogers expanding onto the web for the multi-channel sweep.
But that’s not the whole story. Keeping up in the outer lanes are a number of pure-play dot-coms companies who’ve stayed in the race by figuring out how to negotiate the obstacles that tripped their competitors. In the process, many have reinvented themselves, moving into business models far different from those initially conceived. Some, like JustBalls, are going after new markets. Others have become chameleons, packing up the most valuable of their lessons learned online, leaving retail sales and re-emerging as suppliers.
Still other dot-com retailers are thriving by finding and filling less-competitive niches, identifying unserved market opportunities potentially profitable but too small or too specialized to bring in crowds of other players. And some, sniffing out shifts in the capital market earlier than most or just tightfisted from the start, conserved enough cash to allow themselves to grow the way new companies used to before Wall Street inflated expectations of the industry: gradually, and in scale with revenues.
The race isn’t over yet for these dot-com survivors, and there’s no single winning track. What’s clear, though, is that these are companies that have learned from experience—their own and others’. Their success stories so far cluster around common themes. Money doesn’t burn a hole in their pockets. When they do spend, it’s on people or technology to make buying easier, not necessarily flashier, for the consumer. Or it’s on programs that fast-track them directly to qualified buyers. Some now bless the fact that they either didn’t seek or couldn’t get funding; it toughened them up. And perhaps most significantly, all have been focused from the start on building a sustainable business and not just on a quick IPO.
New markets
Enthusiasm and curiosity swept Gilbert into marketing at JustBalls, but as his learning curve grew, it became clear the company’s existing business model wasn’t exactly going to produce a slam dunk. “It was going to be the Amazon of the balls category, but I started thinking, how often do you need to buy a basketball?” he says. “Onesie/twosie sales, high acquisition costs, a slow use-up category—it’s hardly a prescription for success.”
The VCs didn’t think so either. But founder Jim Medalia and new CEO Jim Klein, the company came up with a new plan last year. It netted JustBalls $13 million in funding last fall, one of the year’s only major rounds of venture financing for a retail dot-com. Funding was successful in part because the plan expands JustBalls beyond the retail market.
To boost sales, JustBalls reorganized itself to pitch its ball products to institutional customers like colleges, where the average order size is larger, replenishment faster and repeat purchases high. Retail shoppers can still click to buy a pack of golf balls, but a newly launched web site is geared to bringing the ease of Internet ordering to an institutional marketplace formerly served by wholesalers and local brick-and-mortar stores. But scaling itself to institutional sales isn’t the company’s only shift in strategy.
“We decided we could play in the institutional segment of the $5 billion ball space,” says Gilbert. “But the even bigger market is the $60 billion premium and affinity products space. We want to re-purpose the ball product category for gifting, commemoration, cause marketing, fund raising, promotion and recognition. We want to do for the ball category what MBNA did for the credit card marketplace, where they leveraged affinity organizations in a really remarkable way.”
Repurposing equals mass-market mindshift; not an inexpensive proposition. To sell custom-logo ball products and programs into affinity groups—and to make contact with those institutional customers—JustBalls is using some of the venture funds to build a field sales force. It’s started a paper catalog and is planning still another re-launch of its web site to focus even more tightly on affinity and institutional sales.
Under JustBalls’ new model the Internet has evolved from a costly customer acquisition tool to one that takes costs out by automating much of the customer support function on the back-end. Although it has no results yet from its new approach, in a fast-changing Internet economy, JustBalls has moved to do what’s needed to keep its ball bouncing.
Out—and back in
Faced with big competition and a dwindling cash supply, some e-retailers thought out of the box—and out of retail altogether. They are using the assets they developed in e-retail in new ways. After less than two years of operation, Furniture e-retailer GoodHome.com shut down its web site in January. But the heart of its business, the interactive imaging technology that won the site several awards, lives on as software licensed to other retailers and manufacturers by Scene7, the technology company that rose from the ashes of GoodHome.com.
GoodHome had originally spun off from software developer Broderbund, bringing with it the imaging software it soon realized was its prize asset. “Other companies asked if we’d ever consider licensing our technology and the light bulb went on,” says Doug Mack, CEO of both Scene7 and GoodHome.com. “We saw we could get profitable far faster as a technology company than as an online furniture retailer.” Mack and his team started incubating Scene7 within GoodHome.com in June 1999, signing up 10 technology clients ranging from Victoria’s Secret to Minolta by the time the web furniture store closed seven months later. “In the current market you have to make a bet,” he says. “We were certain that technology would be our long term survival and the better path to win.”
So far, the bet seems to be paying off. Private Scene7 doesn’t share financial data, but Mack offers this much: the monthly seven-figure cashburn rate at GoodHome.com has slowed to six figures at Scene7, and profits, doubtful at GoodHome.com before 2003, are on the radar screen at Scene7 for spring of 2002.
Pinch that penny
When the company is founded with your own money, every penny that goes out the door gets scrutinized and thrifty habits become corporate culture. It’s a trait that’s come in especially handy for many an e-retailer since venture capital funding dried up, including Greenwood Village, Colo.-based eBags.
“For the first 11 months, we used our own money, and building a site like ours costs more than $1 million,” says Peter Cobb, vice president of marketing and one of four ex-Samsonite executives who founded eBags. “Everything we spent was by writing a check, using one of our Visa cards, or by taking out mortgages on our homes, so it’s easy to stop and ask if this is the right thing to do.”
Frugality has been the mantra at 2-year-old eBags, which recently shipped its 1 millionth bag and which is aiming for profits by the end of this year or the first half of 2002. To get there, the company stays lean, trimming staff by 22 late last year and dropping its New York public relations agency to take duties in-house. It’s passed on major portal deals in favor of less-expensive placements on the big three—AOL, Yahoo! and MSN—and tested but passed on major market TV, radio and newspaper advertising. Instead, it’s put its marketing emphasis on the medium where it lives: the Internet. Besides the portals, it has 25,000 affiliates and partnerships with about half a dozen sites.
True to form, it does it all as inexpensively as possible. “Virtually all of our online placements are performance-based,” Cobb says. Under that umbrella, eBags is pursuing more partnerships of the type it recently signed with United networks, Untied Airline’s e-commerce division and operator of the UAL web site. The partnership set up a store at United.ebags.com, a click away from UAL’s home page. Mileage Plus members get miles for purchases and United gets a percentage of each sale. The cost to eBags is nothing, expect for technology set-up costs.
Given its careful spending, what does get eBags to open its wallet? “We have three things we’re after,” Cobb says. “To drive traffic, increase conversions and build our data base.” That means about 70% of its marketing budget goes to support its various online marketing agreements, and an additional chunk—about 15%—goes to support e-mail campaigns. A current sweepstakes promotion is a million-mile giveaway to those who register. The air miles cost eBags in the tens of thousands of dollars, but Cobb says it’s worth it: in the first 45 day of that promotion, 150,000 site visitors had provided e-mail addresses by registering to win, and about 80% of the names were new to the site.
Sales at eBags are projected to edge toward $20 million this year, reflecting growth of about 50% over last year, and conversion rates have doubled from last year, Cobb says—and all on a marketing budget reduced from last year by about two-thirds.
Niche play
Sites like Cooking.com are betting success on their ability to zero in on and dominate a narrowly defined category not broad enough to attract a lot of competition.
“They have a chance where there’s not such mass-market appeal that bigger competitors will pounce on that market right away because there’s a big opportunity,” says analyst Paul Ritter of the Boston-based Yankee Group.
New York-based UncommonGoods.com (see “Ex-Wall Street Analyst meets artists, together they craft an uncommon e-retail site,” page 14) is following a niche strategy, but instead of moving into one already defined, it’s created one for itself. Less than a year after its launch, the online seller of home accents and gifts is predicting profits by the end of next year. Its identified market is shoppers who favor the high-end yet offbeat items available in high-end regional craft fairs or local boutiques.
Assembling an inventory from far-flung quarters is accordingly one the company’s biggest challenges. UncommonGoods has extended its outreach to suppliers cost-effectively with a unique scouts program in which selected shoppers comb their local regions for merchandise suggestions for the site. The scouts collect a percentage on items selected for and sold on the web site.
Redefining retail
Even the CEO of St. Paul, Minn.-based Bellacor.com, a home furnishings web site that launched last year, isn’t sure whether to call his company a retailer, a wholesaler, or a manufactures’ representative. But figuring out what to label the business model is less important than the numbers it’s generating. Bellacor is heading into its second year of operation with annualized revenues of $3 million to $5 million, and the expectation of profitability in its fourth quarter.
Pretty good, considering what happened to Furniture.com, Living.com, and a whole bunch of home furnishings sites that are no more. Jan Andersen, CEO, credits the business model with the company’s success. “Just putting a store online doesn’t cut it,” he says. “If you look at most of the failures, you could see that what you could do there was essentially no different from what you could do at a store except that you did it online. We changed that dynamic.”
Bellacor gives shoppers access to about 700 manufacturers in the highly fragmented home furnishings market, through the site’s secret weapon—veteran product specialists who work with shoppers on a one-to-one basis. All have long-term retail experience in home furnishings.
“It’s easy to teach someone about how to use a computer,” Andersen says. “It’s harder to teach them about the home furnishings marketplace.” Shoppers can e-mail what they’re looking for (“What can I put in my front hall?”) and get a response from a product specialist—the same one who stays with them through the entire process until they find the product. Bellacore has access to a half million SKUs, but limits the images and descriptions available for browsing on its site to 6,000 to 7,000. If shoppers don’t find what they want by browsing, Bellacore will digitalize images and push through product descriptions for additional products from the larger pool, based on the product specialist’s read on the shopper’s preferences.
“It would be bad business to keep them all up on the site,” Andersen says. “With that many SKUs it’s probable that in the first year, 90% of them wouldn’t ever be considered anyway. It’s much more cost effective to do it this way than having a permanent staff that dose nothing but try to anticipate customers’ wants and keep refreshing the content.” The personal attention from product specialists keeps conversion rates up at about 4%, average ticket price at about $400, and returns to less than 4%. About 20% of Bellacor customers buy from the site again within 90 days. While he may not know yet what to call his business model, he’s already sure about this: “No site has integrated live assistance like we have. It’s really beyond customer service—we’ve taken it to a whole new level.”
Mercedes or Toyota
Many of the dot-com survivors fly quietly beneath the radar of Internet stock analysts. Few are public, venture investment is often limited or nonexistent. Spending is limited, revenues are modest compared with what the deeper-pocket multi-channel sellers pull in, and profits are correspondingly small.
That’s called scaling the business, a proven strategy for long-term survival largely ignored in the boom climate of Internet retailing’s earliest days. For while scale is a term most often used lately to describe a company’s ability to ramp up quickly and economically for a growing customer base, understanding scale also means knowing when to slow down.
“Scale means managing expenses and revenues over time in such a way that they’re in line,” says Bob Smith, a consultant and the former executive director of e-retail trade association shop.org. “If you look at an eToys or a Garden.com everyone would say they had great sites and content and knew how to service the customer. There was only one problem: they were building a Mercedes when they could have been building a Camry.” l
mary@verticalwebmedia.com
The smell of money
As pure-play dot-coms battle each day for survival, some have an added edge. That edge is in the brand strength of the product lines they carry. Take FragranceNet.com. The 3-year old New York-based company, with annual sales of about $8 million, is one of the few public e-retailers of its size. In February it did what other pure-plays still just dream about: It reported profits. For its third quarter ended Dec. 31, 2000, the company posted gross profit margins of 39% and operating profits of $239,000 on sales of $3 million; for the first nine months of its year, it reported gross profit margins of 39% and operating profits of $298,000 on sales of $6.3 million.
The site offers 3,400 fragrances. CEO Jason Apfels says the company is built on selection and customer service. Shipping charges are built into the cost structure so there’s no visible shipping charge to the consumer, and prices are set so that FragranceNet can cover the shipping, offer discounts ranging from 2% to 70% off store prices, and hit its margins at the same time. FragranceNet also saves upfront costs by not ordering from its supplier network until a customer places an order.
The model has been a winner for the company, but there’s no denying it’s gotten a big boost from the loyalty that fragrance-buyers develop toward their preferred brands. The company sells no knock-offs, only the real thing. “Certainly when Chanel does advertising it doesn’t hurt us, because people will surf the web and look for it a little cheaper and a little more conveniently,” Apfels says. Because people tend to order what they know and what they’ve used in the past, he adds, returns are kept at about 1%. Products’ built-in brand strength also helps keep average customer acquisition costs at about $7, Apfels says.
Brands also play a big role at upscale culinary web site Cooking.com. “It helps our conversion rates,” says David Hodess, CEO. “People generally know what brand of cookware they want. It’s the same with cutlery and appliances. When people were just getting to know Cooking.com, at least they didn’t have to worry about the products.”
