Company Profile: The Missing Link
Edmark had it all: on one hand, gifted employees creating award-winning products and, on the other, consumers who were eager to buy. Too bad it overlooked the customer in between
Never underestimate the power of a customer. Stockbroker Scott McMullin is sheer momentum as he races around a stack of Mortal Kombat II in a downtown Boston software store one lunch hour. Spying a computer screen displaying Bailey's Book House, a children's software program, he recognizes the product's feline star and freezes. "Oh, Edmark! Are you from Edmark?" he blurts to the field rep running the demo.
Before he can get an answer, McMullin launches into a giddy litany of all the Edmark products he owns, what his five-year-old daughter and three-year-old son can do with them, and why the lukewarm prospect who's been staring vacantly at the screen until now should buy anything with the name Edmark on it.
"You should probably start with Bailey's. Yes, she's right about that," McMullin says, nodding to the field rep. "My daughter also loves Millie's Math House. Have you seen Sammy's Science House? How old did you say your son was? . . . OK, maybe you'll wait a few months on that."
By the time McMullin is through with him, lawyer Terrence Cullen will be a new convert to the Edmark brand, his outstretched arms brimming with software and trinkets as he marches toward the register. McMullin will pluck from the shelf one of the few Edmark titles he doesn't own and follow him. And word of mouth will have once more bestowed its kiss on Edmark.
The scene stands as a tribute to a small company with big dreams and remarkable products. To a chief executive who never stops doing her homework or paying attention to what's good for her customers. To a team of talented individuals who deliver products that will push the company to an estimated $20 million in revenues this year. To the patient investors who funded the company's crusade to establish itself despite a welter of competition in its white-hot market.
Too bad great products, great people, and great money weren't always enough to deliver several hundred thousand McMullins. For, despite doing nearly everything right in 1993, Edmark still came up millions short. And it came up far short of chief executive Sally Narodick's best-laid plans for how Edmark might survive in a market stalked by the likes of Microsoft and Disney. "I was devastated," says Narodick, recalling her reckoning late that year that it would take more than rave reviews, blue-ribbon products, and ardent customers to build a great company in a great market. "I thought all that would have more clout," she reflects. "But they couldn't carry us everywhere we needed to go."
Edmark, a company with a solemn educational mission, had to learn that pleasing the McMullins and the Cullens out there was only a prerequisite. The real test lay in understanding its other customers -- the retailers who stocked and sold those products -- so that they, too, might learn to adore Edmark.
Because if your distribution channel doesn't love you, who can?* * *
"That's an excellent question," answers Narodick, sitting across from a visitor in the company's boardroom. She has just been asked to explain how her product mix fosters a brand identity. Her response prefaces a brisk walk to her board where she hastily draws a diagram to illustrate her logic. Your best teacher, the one who expected your finest work or knew you had more than you were showing, comes to mind: no-nonsense, prepared, persistent, impossible to con.
Gracious but unmistakably serious, Narodick looks like Suzanne Pleshette -- hold the laugh track. Only her blue suit suggests the two decades she spent as a banker. Her financial acumen also reflects those years. "She'll take a balance sheet and an income statement apart quicker than most Fortune 500 CEOs do," says board member Hunter Simpson.
For the moment Narodick, who holds a master's degree in teaching but never taught school, is transforming her boardroom into a classroom.
"We organize the products into families," she says, looking back to make sure her student is following. "Bailey's Book House, Millie's Math House, and Sammy's Science House make up one family: the early-learning line." To clarify, she sketches a genealogical tree showing the propagation of Edmark's product line. It stretches across an array of disciplines -- math, science, reading, writing, critical thinking -- and across a broad swath of customers, kids aged 2 to 12. If Narodick has her way, those kids will spend no small part of their childhood with Edmark, progressing from one title to the next, from one line to the next.
Narodick's reasoning is irresistible. Since a customer almost never needs more than one copy of even the hottest-selling software program, winning repeat business is a function of continually expanding and upgrading a line. "That's the only way to keep them," notes Narodick. "Unless you've got a smash hit, you can't build a brand with a single product."
Five and a half years ago, when Narodick took the CEO's spot at Edmark, the publicly traded company was an obscure, not-quite-$3-million-a-year purveyor of reading products (mostly workbooks) for the special-needs segment of the school market. Narodick's friends and colleagues watched in horror as she leapt from her 31st-floor executive suite in Seattle's largest bank, finally landing in the corner office of Edmark's then-dingy headquarters, also in Seattle.
Although Edmark had earned the respect of educators in its tiny niche, it had earned little else. Profits had been modest and irregular. The company had spent 14 years in a fitful sleep before it broke $1 million in sales. "The business was going to go nowhere as long as it stayed in its small, noble niche," says early investor and former board member Don Barton.
Narodick, a late-blooming entrepreneur (she will turn 50 this year), was recruited by an exasperated board to come in and finally take the company (it will turn 25 this year) somewhere. But where, exactly? Her obsessive habit of "doing her homework" yielded an answer.
The rising birthrate, the gradual increase in home-PC ownership, and the dearth of educational software on the consumer market all suggested to Narodick that an explosive category was about to be born. When she saw a handful of early-education products sell more than 100,000 units each, she knew this was a market that would serve one of her elegant financial models well. "You could see the consumer market for this stuff on the horizon barreling toward us," explains Narodick. "It was a ramp opportunity."
Her scholarly strategy, cautious enough to garner shareholder support, recommended entering educational software gradually. "We'd take it in bite-size increments," Narodick recalls deciding. "Raise a little capital, hit a few milestones, go back for more." Her plan, ambitious enough to demand superb products, would be nothing if not reasonable.* * *
Narodick's vow to market only the finest software under the Edmark name was a powerful lure for an award-winning educational-software auteur named Donna Stanger.
Stanger, a frugal developer with impeccable credentials as an educator, had both the instincts and the track record, Narodick recognized, to develop Oscar-winning products for Edmark. "I didn't want to do B movies," says Stanger, her soft-spoken manner belying a flinty ambition. Narodick also realized that her gambit to launch an Edmark brand in the educational-software business would be a stillborn fantasy if she failed to find a product visionary.
"It's all about great product," says Narodick. "A brand starts there. It's sustained there. And it can be lost there." Without high-quality products, there would be no fawning reviews, no groundswell of demand, no welcome from the distribution channels, she reckoned.
"We were willing to pay what it would take to get a top-notch developer here," says Narodick. "But four? At once?" That was the bargain struck in November of 1991, when Stanger refused to travel from Rochester, Minn., without her entourage of hotshot programmers. Stanger's "package deal" included three of the "kids" with whom she had been hacking for more than a decade. She called herself their "den mother." Some were alums of her fifth-grade class. All were under 25. None had developed a consumer product before.
In one fell swoop and with no immediate sales boost to offset it, Narodick would have to increase payroll 20% to hire the brood. While she did have $1.6 million in freshly raised equity capital, a cash-flow crisis that only a little more than a year before had forced her to cut salaries and staff was still fresh in everyone's mind. The risk that no products would result was real. But so was her commitment to making products that were so good they'd practically sell themselves. Narodick stopped blinking long enough to see the benefits of importing a team that was already humming: these people knew how to work together, they'd ramp up fast, they'd cut the time to market. She told her board she'd found a "turnkey solution," and before 1991 was out, the Minnesota Four, as insiders came to call them, went west.
The team had its work cut out. Its first products had to be winners. Only a third of the software released in a year ever gets reviewed. Even less of it finds a perch on a retail shelf.
By the summer of 1992, in about six manic months, the team had produced working demos of the two products that would ship that fall. Millie's Math House, a numbers program for preschoolers, targeted a nook in the market where little competition existed. KidDesk, an interface that prevents kids from damaging their parents' files, aimed not simply to exploit the market but to grow it. When parents stopped worrying that Junior might trash the system folder, then they'd be game to buy more kids' software.
With the product still shrouded "in smoke and mirrors" -- "If you were careful and you talked fast enough, you could get through a demo" before it crashed, recalls Narodick -- Edmark took its show on the road. Narodick and her cohorts buckled their PCs into empty airline seats (they were too nervous to check them) and flew to wherever they'd finagled five minutes with a reviewer or buyer.
"We knew we had to get reviews," recalls Narodick. With no direct sales force and no money to advertise, "it was the only cost-effective way for us to talk to our customers."
Mailings, phone calls, and electronic messages exhorted 40 influential reviewers to spare 20 minutes. "If we weaseled even a few minutes with a reviewer, we almost always got some ink," says consumer marketing director Jennifer Cast.
Later that fall the first reviews rolled in. Thumbs up, they said. When the Wall Street Journal's personal-technology columnist published a glowing report a few weeks before the holidays, Christmas came early for Edmark. Calls from buyers and customers jammed the switchboard. Narodick's meticulous plan was working: the products and their plaudits were pulling open doors to distribution.
That first year the company gained distribution with Egghead Software and a smattering of other computer-specialty stores and catalogs. Ingram Micro, the industry's largest distributor, agreed to carry Edmark's wares. The company won the first of more than 55 product awards it would clinch in the next two years. It posted sales of $6 million in 1992. "We were off," says Narodick.* * *
When vice-president of consumer sales Dan Vetras joined the company, in October 1993, it already owned a trophy case. In it, the gold statuette that Millie's Math House had won from MacUser magazine stood flanked by Codies from the Software Publishers Association. After less than a year in the business, Edmark was racking up its Oscars. "This is stuff I ought to be able to sell by the truckload," figured Vetras, a veteran of DEC and Lotus.
His mandate was clear: take those products and get them into the retail channel. Reams of registration cards, every one read by Stanger and Narodick, confirmed that customers were eager to buy more. The company was introducing two additional products in 1993 -- the second release in its early-learning line, and the first in a new line that Stanger had dreamed up for four- to eight-year-olds, called Thinkin' Things.
A consumer sales staff consisting of Vetras and two sales reps ought to be enough to sell what many agreed was the best stuff on the market, Narodick figured. One reviewer would dub Thinkin' Things "quite simply the finest children's software ever released." Who wouldn't clear a space on a shelf for that?
Having promised shareholders that Edmark would remain profitable even during its formative years as a consumer-software publisher, Narodick allocated only a nominal budget to promote Edmark's two new products. There was little money for trade advertisements, merchandising gimmicks, or promotions. "We thought that stuff was expensive fluff," says Vetras. "We were above all that."
While Narodick's prudence comforted shareholders, it struck retail buyers, who expected a little show business, as weakness. Four products, only two of them related, didn't make a complete line. And competitors, many with dozens of products and buckets of bucks, had launched aggressive promotions to persuade retailers to stock their lines. Without the marketing dollars or the promotional pizzazz to push products through, "we were fighting bitterly for shelf space," says Vetras. And losing.
"Our competitors were in those retailers' faces every day," says Narodick, "with buy-two-get-one-free giveaways, rebates, money-back offers. We didn't know it until it was too late, and we got elbowed out of the way." Adds Stanger: "Basically, we were too timid." And too tardy.
The buy-in season, when retailers were open to new titles, had passed before Vetras had come on board. Some of the retailers that did pick up the Edmark line couldn't always reorder when the inventory had been sold; they had maxed out their credit lines to stock products from Edmark's competitors. The company was facing stock-outs around the country. Board members and customers were calling to report that Edmark was absent from the shelves of key markets. No product in San Jose's Egghead? What was going on? The company had no way of knowing where or when product was sold out. The wasted opportunities were too many to count.
As the holiday season of 1993 drew near, Edmark claimed distribution in fewer than 2,000 outlets. Not a single superstore carried the entire line. "It was nothing but pain every day for half that quarter," says Vetras.
Disappointing sales -- only half what Narodick had projected -- left employees' spirits deflated. Revenues of $8.7 million that year netted only $125,000 in profit. The stock went nowhere. Bonuses were lean.
"Does this mean the doors are closed on us?" Narodick remembers thinking. "Are we left out of the game for good?"* * *
A superior product -- even one that boasted bright little characters singing and dancing their way through the alphabet -- wasn't enough to make retail buyers fall in love. Edmark's precocious cat, its clever cow, and its irresistible orangutan had won the hearts, Vetras says, of "the tweed-jacketed, Volvo-driving 130-plus-IQ set" who shopped at specialty chains. Unfortunately, those buyers were a limited species.
Without wide distribution in the superstores and with mass-merchandisers dominating the retail trade, there was no way Edmark could build its brand. And without a brand identity, there was only a slim chance Edmark would survive the crazy reel of growth sweeping its $650-million industry. "This market would leave us in the dust," says Narodick.
A royal flush of products, properly promoted, would have to ensue before big retailers would cede shelf space. The company had to become as good at selling those products -- to the retailers who resold them -- as it was at making them.
"I always knew the retailer was my customer," says Narodick. But her intellectual acknowledgment didn't dissolve the distance between her and retailers: she still didn't identify "quite as intimately," she says, with the customers who stocked and sold the product as she did with those who took it home and used it. "After all, I'm one of them," says Narodick, a mother of two and a school trustee. "I go to PTA meetings. I use these programs with my kids. I understood what parents want, what kids need. I didn't know what retailers want, what they need.
"I didn't understand the theater of retail," she says. "That I had to learn."
And so Narodick, formerly a straight-A student voted girl most likely to succeed in Clinton (Massachusetts) High School's class of 1962, set out on a remedial course. Dan Vetras, a self-described "dumb offensive lineman" for the very same high school a decade later, would be her tutor. "Dammit," she told him, "we're going to do what it takes to play in this game. Just show me the drill."
"We had to recognize the power of the channel," says Vetras. "And stop thinking all we had to do was sell through it. We had to sell to it."
Maybe some buyers had a place in their hearts for wholesome, high-quality products that helped kids learn. Maybe others had a bigger place for splashy promotions and free drinks. In either case, they didn't have time to listen to every vendor regale them about the quality of its products, Narodick learned. "They wanted to know, Is it going to turn quickly? Will there be more products coming? Would we promote them? Could we generate excitement?" she says. Those were new questions that the old homework hadn't prepared her to ace. So she looked for extra help.
Doug Mackenzie, a fan of Edmark's products and a partner at the prestigious venture firm Kleiner Perkins Caufield & Byers, obliged by leading a round of equity investment that put $5.5 million into Edmark's coffers, paying the market price of $10 a share. Edmark could afford to merchandise in stores and to place ads in the trade press and in consumer magazines.
Narodick braced investors for the three quarters of losses Edmark would report to soup up its selling and add new products. Stanger staffed up in development and hit the fast-forward button. The company doubled its line to eight products in less than 12 months. It was "the most amazing team effort I've ever been a part of," says Stanger. Programmers, engineers, and animation artists worked into the dead of night for months. ("If anyone here thought this was just a job," says product manager Henry Shires, "they'd be in a world of hurt.") By summer the development staff had working demos of Sammy's Science House, the third in Edmark's early-learning line; Thinkin' Things 2, the second in its critical-thinking line for 4- to 8-year-olds; and the first two titles in a line called Imagination Express, a series of interactive story-writing programs for 6- to 12-year-olds.
Next, at Mackenzie's urging, Narodick hired seasoned brand builder Mark McNeely to head the marketing push. "Edmark had all the ingredients for a brand: it was making some of the best children's software on the market," says McNeely, the former chairman of a top Seattle ad agency and an alumnus of giant Ogilvy & Mather. "Customers loved it. And the company had stayed true to its mission despite all the froth and hype in the market. Sally had staked the high ground and stayed there." It was a good location for a brand. If only retailers would agree.
Now Edmark offered retailers a product line that embraced older kids as well as preschoolers. "We don't sell orphans," Narodick would tell them. "We're selling families of products to families of users."
The company had spent more than $3 million to develop those new additions to its families. It had budgeted even more to market them. Would that be enough to get distribution on crowded retail shelves?
Not unless the distribution channel -- the number of retail outlets selling software -- expanded. Narodick bet on it. "As a market moves from early adopters to the mass market, channels of distribution must expand," she explains, pointing to a framed chart on her wall. "We wagered that law would hold true."
This time her homework was dedicated to her channel: Narodick, Vetras, and the team talked to industry analysts and retail buyers and venture investors to suss out the superstores' inventory and expansion plans. They scoured the retail trade press, the annual reports and prospectuses of publicly traded retailers, and the forecasts of hardware manufacturers. Narodick and nearly everyone at Edmark hit the aisles themselves.
Indeed, traditional software stores were greatly expanding their shelf space, and software like Edmark's was popping up in unusual venues: on bookstore shelves and in toy-store displays and, most notable of all, in the cavernous aisles of mass merchants like Wal-Mart and Price Club.
But Edmark, Narodick knew, needed to do more than just get its software onto those shelves; the company needed a system for tracking its progress from them. Where were Edmark's products moving? Where were they sold out? How were they positioned on the shelf? What were the company's rivals up to? Borrowing an idea from the company's competitors, Vetras deployed part-time field merchandisers in 10 major metropolitan markets to augment the employee shoppers from Edmark.
"Information is power," says Vetras, who winced at what the first few field reports revealed. In some stores Edmark's products weren't making it out of the stockroom. They were sometimes poorly placed or poorly understood by salespeople. "All of a sudden we started to know what was hurting us," he says.
Edmark's merchandisers fanned out to stock shelves, demonstrate products, and teach store personnel how to sell Edmark. Their biweekly field reports gave managers the skinny on buyers, shelf position, and inventory levels. They told headquarters which promotions worked. They delivered the lowdown on what the competition was doing and how to respond. They faxed and phoned in leads. And they provided all that for an annual cost of about $25,000 each, according to Vetras.
The stock outages abated. Sell-through improved. Inventory turned over quicker.
Meanwhile, the sales force pressed its campaign to jimmy open big accounts. None was more desired than Comp USA, the computer-superstore chain.
"Almost every day, Sally would come into my office and say, 'When are we going to break into Comp USA?" recalls Vetras. "If we weren't there," he says, "we might as well get out of this business."
For months Edmark had been frustrated in its attempts to court a Comp USA buyer and get its line onto those shelves. With so much new product in the pipeline, the company urgently needed to crack the account. "Somebody in that account was going to give us a hearing," Vetras recalls thinking.
Narodick reluctantly agreed to foot the bill for Vetras and his team to attend a pricey trade show called Retail Vision that spring. For $15,000 they'd get 20 minutes of face time with high-level buyers. They chose the mass-merchant and superstore channels, where they knew they'd find higher-ups from Comp USA, among other chains. They copied the homework Narodick never ceased doing on the industry, packed their presentations with the data, loaded what demos they had onto their laptops, and headed for the Phoenix Ritz-Carlton.
This time they let the show begin: there was the guy in the orangutan suit -- playing a character from Thinkin' Things -- beating a drum for Edmark. There were the T-shirts that trumpeted "I partied with an animal."
"I threw a fit over that one," recalls Edmark's restrained boss. "But the sales team was right."
Edmark, which had learned to make extraordinary products that reviewers lauded and users loved, was now learning showmanship -- how to shake it with its distributors.
After Vetras had returned to headquarters the following Monday, he got a call from a vice-president at Comp USA, asking a simple question: "Why aren't we carrying your line?" "I thought someone was playing a joke," Vetras recalls.
Three months later, in the summer of 1994, Comp USA signed a $150,000 purchase order for the entire line. Edmark agreed to ante up for joint marketing programs, including events Comp USA dubbed Educational Expos. Could Edmark send reps to work the weekend events? Of course, Vetras said. When he asked where to dispatch the reps, he was given 51 locations -- 10 cities to be covered on each of five weekends. It didn't require much arithmetic to figure out that his part-time merchandisers couldn't handle that. It would take more than half the company.
Vetras and his team put a sales kit together and gave Edmark employees -- people in accounting, in technical support, and in testing, many of whom had never sold anything -- a crash course on how to demonstrate and sell a product. "People were blowing out of here on Friday afternoons like commandos. It was a rallying point for the whole company," Vetras says. "Anyone who thought selling was a matter of doing lunch and taking an order got a taste of reality."
Comp USA applauded Edmark's act. Comp USA executives in Dallas called store managers in every location at which an expo had taken place. "We were getting straight A's," says Vetras.
In October 1994 Comp USA placed a $500,000 holiday order and agreed to carry every title in more than 80 stores.* * *
Before the holiday buying season closed, Edmark hit the 5,000-outlet mark. Traditional merchants such as Egghead Software kept the orders coming. In addition to Comp USA, Edmark had scored new distribution in Office Depot, Costco, and Wal-Mart. Those were high-stakes prizes. Category killers and other mass merchants stocked "long and deep," Narodick reports.
In return, those retailers expected products to turn over quickly and virtually sell themselves. There were few opportunities to advertise or merchandise in the stores. Products that failed to sell through in 30 days would be yanked, and then either cast into an even deeper discount bin or promptly shipped back to where they came from. "If we let the product stay too long on the shelves," explains Narodick, "they'd ratchet down the prices and clear it. That could kill us."
To ensure sell-through -- and alleviate buyers' primary worry -- Edmark had to offer retailers, especially the mass merchants, a "value" proposition they could sell to customers. Shrink-wrapping frisbees or sunglasses with the products, as Edmark had done, wasn't going to cut it. Instead, the company sacrificed KidDesk, its first product, to a holiday promotion. It bundled that product with all its other products and gave it away free. A classic two-for-the-price-of-one ploy, it would seed the market for KidDesk but cannibalize sales. "It was a tactical risk," says Vetras. "But we had to punch the other products through."
At the same time, inside the box, Edmark offered a simplified registration card and a new incentive -- a chance at a $10,000 savings bond -- to encourage more users to offer their names and addresses.
The strategy worked. Tens of thousands of registration cards poured in over the next few months. By mid-October reorders were streaming in. They were still coming in November. They flowed in through December. The company sold nearly 250,000 units, for sales of $6.6 million that quarter, including $1 million to schools. It was a 275% increase over the previous year's holiday quarter, and more than the company had posted in most full years. Edmark's still-minuscule market share tripled from less than 1% to 2.7%. Wall Street rewarded the performance with a 50% jump in the stock price in the weeks that followed. Analysts upped their projections for Edmark to $20 million in revenues this year. "We were on a high that just kept going," says Narodick.
Not that the distribution battle is won. Competitors aren't exactly surrendering: Microsoft's Magic School Bus is roving the streets. Disney's Lion King is roaring off the shelves. Most of Edmark's rivals are posting robust growth, planning more products, and plotting better promotions. Does Narodick understand what it takes to keep both sets of customers -- the ones who "SKU" her products up for retail sale as well as the ones who boot them up for a preschooler to play -- faithful to her fledgling brand?
By her reckoning, it will take six more successful new products this year and a couple thousand more outlets through which to sell them. It will take new packaging, more advertising, and smarter mailing to a database of registered users, which has swelled to include more than 150,000 names.
It will also take a few hundred fake iguanas and a lot of Yukon Jack -- for the snakebites Edmark will serve at a party touting its new Rain Forest product to retail buyers at this year's Retail Vision show. "We're going to keep those buyers jazzed," says marketing director Cast. And just a tad boozed. "Don't put that in there," says Vetras. "Sally will go berserk."
That doesn't mean she won't buy every drink in the house that night. Or that the bash won't be followed by a surgical strike of a rollout. Although the toy tree frogs and the swinging Peruvian band might soften buyers, they won't bowl them over any more than the whiz-bang products did. The great selling will have to be matched by more great products, made by more great people, funded with more great money -- and even then, there are no guarantees.
Just ask four-year-old Terry Cullen. Only days after his father, Terrence, had bought him Bailey's Book House, he spied Bailey's buddy Millie on the shelves of a Lechmere store just north of Boston. "He enjoys Bailey's," says his father. "He seems to be learning something. And it's better than watching Power Rangers." So he rifles through the shelves for a CD-ROM version of Millie's.
It's out of stock.
The Cullens won't buy the product in another format. And young Terry's not-so-pent-up demand overwhelms him. "Why can't I have Millie's Math House?" he wails, as his parents race for the exit. "How about Lion King?" he bargains. "Don't they have Power Rangers?
"When am I going to get Millie?"
Soon, assures Narodick. "We're working hard to get these products everywhere customers might look," she says. "We're working hard to convince retailers that there are thousands of little Terries out there begging for them." Perhaps, she's likely thinking, it's time to call in the orangutan.
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