A Bright Future: After the Train Wreck

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.

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