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E-Tailing By The Numbers
The key to successful on-line sales for this shoe site lies in finding a great niche and sticking to rigorous numerical standards.
Published March 2001
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The Scorekeepers
What's the key to successful online sales? First you find a great niche. Then you set rigorous numerical standards and stick to them
Company: Shoebuy.com, in Boston
What it does: Sells shoes online
Number of employees: 8
Conventional wisdom: Everybody knows that E-tailing is dead. Just read the papers.
Unconventional wisdom: Executed well, the E-tailing model can yield healthy profits.
Revenue growth: $1.8 million in 2000; more than $30 million projected for 2001
Profit profile: Founded in April 1999, the company first turned a profit in January 2001.
Capital: Start-up investment of $200,000 in personal funds; $2.3 million from angel investors
Selling shoes online. It's the kind of business you'd expect to be the brainchild of a fashion maven with a closet full of Manolo Blahniks. But Scott Savitz and Craig Starble couldn't care less about shoes. What turned the two investment bankers on to peddling oxfords online was the opportunity to use their quantitative skills to test whether E-tailing could really work.
In early 1999, Savitz and Starble were working at BankBoston (now Fleet Bank). Starble, now 38, was managing global treasury funds, while Savitz, 32, specialized in individual investments. Investment bankers, says Savitz, take a "very formularized approach to recognizing value in any opportunity," adding that he himself was always conservative with his clients' funds. "We never went for home runs," he says. "We aimed more for singles."
As the pair witnessed all the start-up activity in E-tailing, they decided to take a shot at it themselves. But what exactly would they sell? At the time it seemed as if almost everything that you could conceivably sell online was already being sold there. But no one appeared to be selling shoes over the Internet, at least not in any major way. Which, of course, made them wonder why. Would consumers buy shoes without trying them on first? "Until about the fall of 2000 we tried to talk ourselves out of doing Shoebuy," says Savitz. "But the more we did the numbers, the more it made sense."
What made particular sense to them was that the people who were already buying $2.5 billion worth of shoes through mail-order catalogs would almost certainly be open to shopping for them online.
As Savitz and Starble made their calculations, they came to believe they had uncovered what Savitz calls "a hidden gem." It seemed that if shoes were sold right, they could bring in extraordinarily healthy profits. Typical shoe retailers, says Savitz, start with about a 100% markup, but that usually whittles down to a 3.5% net margin after they deduct all their costs. Savitz and Starble were determined to eliminate as many of those costs as possible. To entice potentially reluctant shoppers, they decided to offer free shipping. But even after subtracting that cost and salaries for customer-service, technical, and business-development personnel, they were left with a staggering -- albeit still theoretical -- 30% net profit.
Savitz was determined to maintain that 30%, which to him meant that the company would have no sales force, no inventory, no warehouse, and as few employees as possible. It would be, in other words, a virtual organization. "The virtual company was supposed to be the promise of the Internet," says Savitz, "but somehow that got lost for a lot of people along the way." Maintaining a warehouse and inventory would erode their precious margin by 18 points.
Moreover, says Savitz, by holding inventory Shoebuy would incur the exposure to loss from radically changing trends in footwear. Adding a sales staff would cost the company another 10%. For that reason, Savitz says, he has no plans to add to his staff of eight at any time soon. "We just have to make sure we never spend more than our model will allow," he says. "Otherwise it won't work."
Armed with what they saw as a terrific market potential and the chance to land some hefty margins, the partners set out to use their quantitative skills to manipulate those numbers to their advantage. The number that in the end would matter most: the lowest customer-acquisition cost possible.
One afternoon last fall, Savitz sat at a folding table in Shoebuy's modest corporate office in Boston's financial district, animatedly describing his passion for keeping customer-acquisition costs low. He briskly rattled off a series of well-known online players and the average amounts he had estimated that they spent to snag a single sale: Amazon, $103; Bluefly.com used to be $245 but got it down to $58. And the now-defunct Garden.com, Pets.com, and Furniture.com had struggled along at $71, $200, and $500, respectively. Savitz wouldn't allow Shoebuy's figure to rise above $15.
