How Shutterfly Tapped Into Its Online Customer Community

CIO — Jeffrey Housenbold was an eBay vice president with an MBA from Harvard . His wife had earned an MBA, too—from equally prestigious Wharton —and she had a high-powered job to match. They were also raising three sons under the age of 5, a full—time job all by itself.

Predictably, what the Housenbolds never had enough of was time. "Between her schedule and mine, I barely had time to talk to her, my kids, my mom, or anyone else outside business," Housenbold confesses. But Housenbold and his wife found a way to capture special moments and share them with friends and family through photography and a website, Shutterfly.com. "We spent $1,900 on Shutterfly prints," Housenbold told me, "and that was the year before I even worked there!" Housenbold became CEO of Shutterfly in January 2005. At the time, the company, which Dan Baum and Eva Manolis had founded in December 1999, billed itself as just an online photo finisher. But within two years, Housenbold had turned Shutterfly into something bigger and smarter—an Internet-based social-expression and personal-publishing service.

Shutterfly still prints customers' photographs from old-style 35mm cameras as well as digital equipment, but now the site also offers a range of personalized products and services that fit its new strategic vision. Customers can get personalized greeting cards, scrapbooks, collage posters, photo books, calendars, personalized stationary, and much more, plus a range of services that make it easy to upload, edit, enhance, touch up, share, and store their digital photos.

By transcending the product boundaries of an online photo finisher, Housenbold could not only survive trends in the photo industry that were decimating some of his competitors, but he also could turn those changes to his advantage. And he could use his new status to exploit larger trends that touched only incidentally on photography. It's a neat and impressive trick, as if a gazelle being chased by cheetahs were to suddenly morph into a lion.

Housenbold had found one of the prime secrets of business growth: changing his business's frame of reference to expand its identity and compete on a new and much larger field.

Know What Customers Really Want to Buy

Talking with Housenbold reminded me of a company that hired me early in my consulting career. Hallmark was one of my early process—reengineering clients. The company's executives told me that Hallmark was not a greeting-card company, but a social-expressions company. Changing the frame of reference had enabled Hallmark to expand the range of products with which its customers could convey their messages. Hallmark wasn't just about cards anymore; now it offered stuffed animals, porcelain figurines, books, pens—any product that could convey feelings between people. Housenbold used the same phrase, "social expressions," but he expanded it brilliantly: Shutterfly's new frame of reference stretched beyond consumer goods to include the concept of an online community.

Housenbold's insight called for a complete makeover of Shutterfly, which led to a sales explosion. In fiscal year 2007 alone, revenues are projected to increase 45 to 50 percent, to more than $138 million. Housenbold discovered the makings of a solid community at Shutterfly. Its clients are amazingly loyal—77 percent of the company's revenue has come from active customers, who currently number more than 2 million. With that information in hand, Housenbold reimagined the company's frame of reference, expanding it from photo finishing to a full range of products and services to facilitate taking photos, editing and packaging them, posting them for friends to enjoy and critique, and exchanging tools and tips with other Shutterfly members. Housenbold saw Shutterfly through a wider lens that took in new trends in the photo industry and society at large. These days, photo printing isn't even the company's main revenue source. Housenbold recognized a major consumer trend and adapted his company's strategy and business model to exploit it.

Americans have never been hungrier for individual expression. In 2006, we spent an estimated $6 billion just to equip our cell phones with special ring tones. People are blogging, podcasting, YouTubing, and MySpacing by the tens of millions. Neilsen/Net Ratings reported a 47 percent year-over-year increase, to 68.8 million users, at the top 10 social-networking sites in April 2006. People are also flocking to sites where they can list items they own and products they wish they owned. Housenbold understood what was going on, and he had the foresight to see how people's need to connect with others in personalized settings could reinvigorate the photo business. Accordingly, he introduced dozens of ways in which Shutterfly customers could turn their photos into personalized objects of expression. But even as he widened his lens, Housenbold stayed focused on his primary business. By resisting the temptation to branch out from its photographic base, Shutterfly has succeeded in building a premium brand and maintaining and expanding a trusting customer base.

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