For Pucci, shouldering management responsibilities was no fun. "That was the highest level of stress in my life," he says.
The team quickly developed an approach to identifying opportunities that would serve the company well in the future. Pucci enjoyed nothing better than viewing the big picture, almost as if he were orbiting earth and looking down to find trends in the collage of business and society that portended demand for certain products. Blohm, feet planted on terra firma, scrutinized customer surveys and product-registration cards. Pragmatist and dreamer shared a strategy: they would identify a need and then develop a product to satisfy it. "Many companies have a cool idea chasing customers," says Blohm. "You get in trouble that way."
That thinking produced a hit in 1996. In late 1994 Pucci had noticed that a controversial book, The Bell Curve, by Richard Herrnstein and Charles Murray, had generated interest in adult intelligence tests. Why not produce and sell an intelligence test for adults? Pucci suggested. The company published an adult IQ test on CD-ROM. "We shipped it, and it flew off the shelves," says Pucci. After that success, the company developed a full suite of self-assessment software.
Although it sold hundreds of thousands of CDs, the company became buried in losses. In 1996 it lost $1.6 million on sales of $1.2 million, and 1997 was little better. The CD-ROM market was a difficult place for anyone to make money, because so many competitors -- new companies, old-line publishers, and others -- were drawn to it. Some, like the Learning Co. and Knowledge Adventure Inc., fought for market share by slashing prices. Rebates were so generous that many products were effectively free. Meanwhile, national retailers such as Best Buy and CompUSA were charging sizable fees for shelf space. "The pricing pressure was tremendous," says Pucci. "Retailing got squashed." Trying to compete in that environment, Virtual Entertainment spent more than half of every dollar of revenues on marketing from 1994 to 1998.
Pucci remained upbeat, at least for a while. "It typically takes several years of losses before you see any profits," he says. "And I always thought that one of the categories we got into would be the one that would spike up for us."
Customers themselves signaled the next opportunity. When Blohm studied customers' software-registration cards, a surprise was waiting: many parents who had used the IQ tests asked for a similar test for their kids. The potential market seemed large. "The testing done in schools appeared to be obscure to parents," says Blohm.
The company responded by producing skills tests that measured achievement in math, reading, and spelling. To make the tests fun, Pucci and Viard combined the questions with multimedia enhancements. With these new CD-ROM products the company became a testing company for both parents and children. To reflect that academic turn, Virtual Entertainment changed its name to Virtual Knowledge in 1997.
New products, new name -- it made no difference to the bottom line. With price cutting still rampant, the company lost $3.3 million in 1998 on sales of $2.3 million.
By 1997, says Pucci, "I felt we were going to go under. We had little money in the bank. What were we going to do?"
The answer came as Pucci watched the Internet grow. What he saw was more and more content available at no cost on the Web. It seemed likely, he reasoned, that the CD-ROM market would be slammed yet again. "People wouldn't buy as much if they could get material for free online," he says. "The Internet's potential was huge. For us, it might be annihilating the business we were in. We were going to get wiped out."
On a Tuesday evening in September 1997 as Pucci drove home, the solution dawned on him. Once again, it was the result of coupling a broad vision of the market with attention to the details of customer feedback. Some parents had asked the company to recommend educational products after their children had taken the company's skills tests. Pucci's epiphany? "The parents could go to a site called SmarterKids.com," he remembers thinking. "We'll provide ways to diagnose kids' strengths and weaknesses and provide products for remediation."
The next day Pucci asked Viard to secure the domain name of smarterkids.com and then wrote a memo to the company's senior managers. (See "Pucci's Epiphany," below.) Pucci wrote that "it's just a matter of time before a true critical mass of Internet/online users emerges, and with it, in time, will emerge a viable business model or two, even for selling our sort of goods and services. ... Imagine doing a massive ad campaign down the road that has the term 'smarterkids.com' plastered everywhere. ... Just as Sylvan uses 'educate.com' for their URL, 'smarterkids.com' is more targeted, arguably more memorable, actually means something, and presumably, it's something that every parent wants. And it's something that we can deliver for a fee."
And that, essentially, was the idea: provide diagnostic skills tests free online, and earn the "fee" by selling a variety of products -- other companies' products -- that addressed the educational needs that the tests uncovered.
