Can videotex finally succeed and become the 1990s version of mail order?
It's a warm, sunny morning in Atlanta, and Ed Warrick, senior vice-president of marketing at Wolf Camera Inc., is explaining the relative merits of high-performance sports cars and periodically checking to make sure his visitor's coffee is still hot. Simultaneously, he's figuring out where he should open new stores, discovering how best to price his merchandise, learning more about his customers' buying habits, and positioning his regional chain to become a national powerhouse.
It's not quite as bizarre as it sounds. While Warrick makes small talk, information about how well Wolf Camera is doing on Prodigy is flowing into the personal computer behind his desk.
If IBM and Sears have their way, Prodigy will be the 1990s version of direct mail. The videotex service delivers news, ads, and mail-order shopping, all through a PC.
Intuitively, you understand the appeal. With the number of two-income families steadily rising, people have more money but less time. What could be better than giving those busy households, which are already doing 7% of their retail buying by mail, another easy way to spend money?
It's an intriguing -- but not new -- idea. The technology graveyard is littered with failed attempts at videotex. In the early 1980s the Times Mirror Co. couldn't make it work. Neither could Knight-Ridder. But those companies were ahead of their time, say IBM and Sears, which have spent an estimated $650 million to develop Prodigy. After two years in operation, the service has 600,000 subscribers. We've got it right, say IBM and Sears. Warrick agrees.
The advantages for him -- and for the other 20 small companies that make up about 10% of Prodigy's commercial clients -- are the service's scope and demographics.
Scope first. Since Prodigy is now nationwide, selling through the service takes $100-million Wolf Camera far beyond its southeastern base of 115 stores. It now can advertise its photographic and video equipment throughout the United States and can receive orders from all over the country. That expansion occurred without additional leases or overhead.
Plus, Warrick is reaching a better class of folks. "If we move into a market of 300,000 people, only the top 50,000 or so have the potential to become our customers," he says. According to Steve Hein, Prodigy's program manager, 29% of the service's subscribers have postgraduate degrees. Their average family income is $70,000.
"Who wouldn't want to reach those kinds of people?" asks Bill Tobin. In April 1989 Tobin and Peter MacMurray founded PC Flowers Inc., based in The Plains, Va., which markets primarily through Prodigy.
Here's how it works. Customers log on through their modems and are given viewing options: news, sports, weather, shopping, that sort of thing. They find PC Flowers either by searching through the menu of shopping choices or by noticing one of its ads, which are mixed in with general Prodigy information, much as ads are interspersed among the articles in magazines. Having found PC Flowers, the customers choose their floral arrangement -- digitized pictures of the bouquets are shown, along with the prices and a written description -- and select the "action" option on their screen. Then the flowers are shipped through the FTD Mercury Network.
Tobin, who started marketing through Prodigy last January, expects to fill 25,000 orders, $875,000 worth in the first year. That would make his company one of FTD's top owner-members.
But it's more than just reach and demographics that give Prodigy's unique distribution channel its appeal. For one thing, the system provides an easy form of market research. "If we are getting a lot of orders through Prodigy from the South Carolina coast, we might consider opening a store there," says Warrick, who began using Prodigy in May 1989.
And if he wants to, Warrick can take advantage of the interactive nature of Prodigy and find out how he should price his merchandise. If he's uncertain about whether a 35-millimeter autofocus camera should sell for $99 or $119, he can try the camera out at different times at both prices. He, like all other Prodigy retailers, can adjust prices daily by logging into the system and fiddling with his ads.
But price, as it turns out, is a two-edged sword. "Prodigy users shop based on price," says Karen O. Nielsen, a telecommunications analyst at Link Resources Corp., a New York City consulting firm. "Prodigy sells products readily available elsewhere, so people know what they cost. They don't feel they should pay for service because they aren't getting any."
So Wolf Camera -- which sells on selection and service in its stores -- is forced to compete on price when it uses Prodigy, and that can lead to some interesting situations. For example, if you want to purchase a Sigma 70-210 zoom lens, you could buy it at a Wolf Camera store for $199. But if you went looking for it on Prodigy, you'd see Wolf Camera selling the same lens for $149. Cutting prices like that can eat into the higher profit margins Prodigy is supposed to produce. At a typical Wolf Camera store, rent, utilities, and labor can easily account for 30% of gross margins. Prodigy takes, on average, an 8% commission on every sale that Wolf Camera makes through the system.
But those 22% higher margins quickly start melting away, thanks to the lower prices Wolf Camera is forced to charge, and also because customers charge every Prodigy purchase, with the fee from the credit-card companies costing from 2% to 4%. "Of course we accept credit cards in our stores," says Warrick, "but a lot of customers pay by cash or check, which helps us produce better margins."
Still, Warrick considers Prodigy's liabilities to be minor. He likes the pay-as-you-go aspect of the commission structure and sees Prodigy -- which now contributes about $300,000 yearly in sales -- eventually generating $2 million, as well as helping with future store-location and pricing decisions.
During the 1990s the old saw about the three most important things in real estate being location, location, location will hold true. The difference? The location may be in a database instead of a shopping mall.
How to use a videotex service
Prodigy is nothing more than a sophisticated version of direct mail. If you're thinking of selling your product direct, here are some things to keep in mind:
* Know whom you're trying to reach. Make sure your pitch -- whether it is delivered by phone, mail, or computer -- goes to your best prospects. Prodigy users tend to be well-educated people with high incomes, a prime market for photography equipment.
* Be specific. If someone wanders into your store, calls you, or stops by your office, you have the chance to explain -- in detail -- why he or she needs your product or service. If you sell direct, you don't have that luxury. Wolf Camera Inc. uses two to five Prodigy screens to pitch its products.
* Offer a competitive price. Unless what you have is unique or, at the very least, hard to come by, people are going to shop you on price. While stressing unconditional money-back guarantees and quick delivery will help -- as it does in Wolf Camera's case -- your product will be viewed as a commodity. People buy commodities primarily on price.
* Ask for the sale. Encourage impulse buying. Provide toll-free phone numbers and stress that your prices are for a limited time only.