A Bright Future: After the Train Wreck
A four-time entrepreneur explores the realities of retailing, both on and off the Web. He finds out that they're the same
As the Great Internet Crash of April 2000 approaches its first anniversary, E-tailers are still clearing away the twisted, scorched ruins of business plans and high hopes, trying to see if E-tailing has a future and, if it does, what that future may look like. But it's tough seeing beyond the carnage. At year-end 2000, New York recruitment firm Challenger, Gray & Christmas estimated that more than 41,000 workers had lost their jobs at Internet companies. People who were tracking the disaster, such as reporters at the trade journal The Industry Standard, counted at least 135 company deaths by mid-December.
A handful of the high fliers left alongside the tracks are now so well known that their names have become synonymous with Internet failure: Pets.com, ToySmart.com, Chipshot.com, Eve.com, Furniture.com, Kibu.com, and Productopia. Less spectacular deaths are chronicled on the let's-not-mince-words site Fuckedcompany.com. And no one tracks the disappearances of the one- and two-person sites, bootstrapped by entrepreneurs who quietly said good-bye.
But despite the stream of obituaries, E-tailing is alive -- and it has a bright future. As I was writing this, industry and brokerage analysts were unwilling to draw up a definitive list of winners and losers, but all were amenable to sharing their thoughts on what sorts of smarts will lead an E-tailer to success.
"E-tail is not different from retail," says Dan Levitan, cofounder and managing partner of Maveron Equity Partners, a Seattle-based venture-capital firm that backed eBay and Drugstore.com. Levitan emphasizes that a successful retailing operation on the Web must adhere to the same key management practices as a brick-and-mortar retailer. "The Internet is technology that empowers retailing, but technology alone is not reason enough for people to buy," he says. "You must be customer focused, not product focused, and you must pay attention to the details."
His argument is merely common sense: all retailers -- whether on the Web or off -- must tightly control expenses, keep a lid on customer-acquisition costs, and, above all, ensure bottom-line profitability.
This back-to-basics message, obviously, is good news for millions of successful business owners who experienced a profound sense of dislocation throughout the "Internet bubble" years of 1998 and 1999, when common sense and good management were so out of style.
"For a time the marketplace was sending irrational messages to managers. Those who listened to the messages got destroyed," says John Hagel III, a former partner with McKinsey & Co., who believes he has divined the mysteries of E-tailing success. He's putting that insight into practice now as chief strategy officer of 12 Entrepreneuring ( www.12.com), a venture-funded E-tailing start-up that was in stealth mode when I talked with him.
E-tailers have to assess whether the products they want to sell are appropriate for the Web. Not all are.
According to Levitan, Hagel, and others, some of the now-discredited and oh-so-irrational messages included the notions that entrepreneurs could build valuable businesses by giving everything away, that merely attracting "eyeballs" would lead to success, and that consumers wanted the latest whiz-bang technology and would put up with extreme inconvenience to spend time on a site that offered a cool experience.
But given that reality is now back in fashion, what rational attributes and practices will replace the irrational and get the successful E-tailer on the right track to future profits?
First, E-tailers have to assess whether the products they want to sell are appropriate for an online store. Not all are. "A high ratio of value to shipping costs is important," says Hagel. For that reason he particularly favors online enterprises that help customers do such things as download software, purchase airline tickets, and trade stocks. A high value-to-shipping-cost ratio is also a key reason that books, music, videos, and DVDs do so well online and sofas and kibble do not. "It can be a logistical nightmare to ship a bag of dog food to a customer's home and try to generate a profit from that," Hagel notes.
However, even if an item lends itself to online sales, market factors often make it a bad choice for entrepreneurs, especially if the product has only a few producers. At first glance, high-priced cosmetics might seem to present excellent online sales prospects, but Hagel points out that Estee Lauder controls much of the upper-end market and keeps an iron grip on distribution, putting its products out of reach for most Web E-tailers. That was a lesson learned the hard way by Beautyjungle .com (out of business), Gloss.com (bought by Estee Lauder), and Eve.com (acquired by Sephora.com, a site owned by luxury-goods company LVMH, which tightly controls its own products).
The three successful E-tailers that are profiled in this issue -- DVD Empire, SitStay, and ShoeBuy -- all play in the sort of fragmented niche markets that Hagel prefers, where no single manufacturer exercises monopolistic power and all sell products with high value-to-shipping-cost ratios.
For its part, ShoeBuy has the biggest challenge. Although the company operates in a fragmented environment with products that have a high value-to-shipping-cost ratio, a few of the very highest profile brands don't allow just any E-tailer to carry them. So ShoeBuy must surmount the challenge of attracting customers without offering such top sellers as Nike and New Balance athletic shoes, Vasque and Montrail hiking boots, Justin and Tony Lama western boots, and Gucci and other high-end dress shoes. However, the sheer volume of brands means that ShoeBuy can offer a wide variety of shoes from a number of well-known names (Frye, K-Swiss, and Nicole Miller, to cite just a few).
But selecting the right niche and getting the brands are no good without accomplishing the vital task of getting E-customers into your E-store. By now the idea of buying Super Bowl advertising time is a joke -- as are anecdotes like the one about inordinately arrogant Half.com, which paid a town in Oregon to rename itself after the company. (That gambit didn't quite do the trick, however. The company ran into the acquiring arms of eBay to avoid going more than half broke. No word on how the 345 people in Half.com, Oreg., feel about being a subsidiary of eBay. )
The new reality of customer acquisition has seen a shift away from pricey traditional media buys to more affordable online methods. Officials at trade association Shop.org say that the organization's members -- which include America Online, BarnesandNoble .com, and Bloomingdale's -- spent 59% of their marketing budgets online in the second quarter of 2000, compared with 49% the previous quarter. Such a trend toward less expensive marketing tactics showed up in a dramatic decline in the average cost of acquiring a customer: down from $71 in the fourth quarter of 1999 to $20 in the third quarter of 2000. The E-tailers profiled in this issue have shown skill -- and a smart skinflint attitude -- in keeping their customer-acquisition costs even lower than that.
"Affiliate programs are one of the most cost-effective online customer- acquisition tactics an E-tailer can employ," says Hagel. "Go to the content sites whose users may want to buy your products, and give them a piece of every sale they send to you." Almost every E-commerce provider can implement affiliate programs inexpensively using free scripts and software.
While lowering customer-acquisition costs goes straight to the bottom line, the most profitable customers, say Hagel and Levitan, are return shoppers. Indeed, savvy E-tailers will concentrate on strategies that will ensure repeat business and higher average purchases per visit. ("Would you like fries with that?")
Raphael Amit, director of the Wharton eBusiness Initiative, refers to such repeat business as a "lock-in." Examples of successful lock-ins include loyalty programs (so-called "frequent buyer" plans offered to Web merchants by a number of companies, including CyberGold, ClickRewards, Beenz, and Flooz); chat and other community forums; site-design characteristics (like Amazon.com's 1-Click purchasing system); and personalized pages or filtering programs that make product recommendations based on the customer's previous purchases. Personalized-product-recommendation systems get more accurate the more a customer buys and thus become more valuable as time goes on. For the customer, switching to another site requires dumping a useful system and beginning the process anew with no guarantee that the new E-tailer will offer a better long-term experience.
In addition to providing lock-ins, Amit says, companies can offer customers products that complement the one they just bought. For example, European-travel company E-Bookers offers its customers convenient access to information about such things as weather and currency rates in the countries they plan to visit. Likewise, Road Runner Sports' site ( www.roadrunnersports.com) specializes in selling running shoes but also offers running clothes, timers, sports drinks, fitness calculators, heart monitors, and even framed art oriented toward the runner. The company's Run America Club creates its own lock-in by offering customers a 5% discount on regular catalog prices, a free magazine, and E-mail notifications of specials.
A growing type of complementary marketing can also be found in the so-called "bricks and clicks" sector -- established brick-and-mortar retailers that have launched E-tailing sites (Kmart and Bluelight.com, for example) and pure-play E-tailers who link up with complementary off-line retailers. Levitan cites Drugstore.com's relationship with Rite-Aid as a prime example of a complementary brick-and-click relationship. Drugstore.com shoppers can order prescription drugs online for same-day pickup at a Rite Aid drugstore and get the pharmacy-benefit coverage provided by the insurance companies with which Rite Aid has relationships.
Levitan also stresses the importance of offering Web visitors what he calls an "aha!" moment. For instance, Drugstore.com could provide "something your physical pharmacist would not or could not do," he says. That might include creating a list of all the products the customer has bought before, which makes it easy to reorder the same items. "The site already has an online prescription-recall alert that can send you an E-mail regarding FDA actions," Levitan notes.
Successful sites must seek to do more than just emulate brick-and-mortar retail models. They must use technology not for its own sake, but to solve a compelling need and provide a valued service that can't be replicated in the physical world.
The future of E-tailing, then, looks a great deal like retailing, only enhanced by new technology. In reality there is no old economy versus new economy. Profits matter; customers reign; solid business practices still trump flaky fantasies that sell $5 bills for $4 and try to make up the difference in volume.
But the Internet has made E-tailing a globally competitive environment in which, more than ever, the entrepreneur has to do everything right. Bad site design and slow downloading equal no customers. The SitStays of the world will need that affiliate program; Shoebuy might want to think about selling socks or shoe trees; DVD Empire might want to bundle some discount videotapes, since VCRs are still grinding away out there. All three of them might want to see what sorts of deals they could work out with brick-and-mortar merchants. And the lessons they learn will be repeated a million times over as companies move faster than ever in the race to remain among the quick and not the dead.
Lewis Perdue is the author of 18 books and has founded or helped launch four technology companies.
With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any "new rules," but there are rules, and we suspect every one of them will look familiar.
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