Pandesic, which by all accounts had happy customers and working software, built its business model on a foundation of optimism that turned out to be misplaced. First, it pioneered the loss-leader approach to software installation fees—a bread-and-butter revenue source for traditional consulting companies—that its major competitors in the ASP industry also have embraced.

Pandesic chose not to charge its customers for such traditional consulting services as figuring out who would use the applications, deciding which business activities would be affected, installing software upgrades and hooking up to the company’s network. Instead, it simply tried to bury those costs in a flat monthly fee and by taking a 2 percent cut of everything that customers sold over a Pandesic-powered website. (Most of its competitors now opt to charge customers a fee per user per month so that as application usage expands, the ASP can make more money.)

Pandesic’s revenue strategy had two unwholesome effects. First, it attracted the customers that Pandesic needed least: small, unproven dotcom startups with no revenues to speak of and therefore very little to lose. (Sources estimate that about 80 percent of Pandesic’s customers were small dotcoms.)

Second, among the customers Pandesic did want—big brick-and-mortar retailers that desired a Web presence—the scheme hit a sensitive nerve.

"Profit margins in retailing are just not that high [between 3 percent and 7 percent or less]," says Randy Covill, senior analyst for e-commerce strategies and applications for AMR Research in Boston. Cutting into 2 percent of that margin essentially meant Pandesic would be helping itself as much as 20 percent to 30 percent of profits. "To say you’re going to take [that much] away is a hard sell," Covill says. Bigger retailers also resented the prospect of having an outsider’s hand in their pockets. "Companies resist giving up a piece of their business in return for a service," adds Covill.

For Pandesic spokeswoman Paula Stout, the company’s inability to attract big customers was simply a matter of wrong place, wrong time. With the booming economy, says Stout, most big companies believed they had the resources to build their e-commerce websites themselves. "Our No. 1 competitor was people who were building [the websites] in-house rather than outsourcing them," she says.

Though Pandesic’s e-commerce engine was by far the most complete ASP package available on the market, it still could not be all things to all customers. "Let’s say customers wanted 1,000 different functions and were willing to pay $10 million to do it themselves," says Stout. "We’d say, ’We’ll give you 900 of those functions and charge you $1 million a year.’" But the big prospects wanted those last 100 features, says Stout, and, again given the economic good times, they were willing to spend the time and money to build them themselves.