E-Commerce: What Works--and What Doesn't--on the Web

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Sharperimage.com, like Eddie Bauer, has found that the more catalogs it mails out, the more Internet traffic the company gets. "Our catalog is far from a loss leader," says Greg Alexander, senior vice president for IT at the Sharper Image in San Francisco. "It drives a significant amount of our Web business." (See "Not Paper Tigers," this page.) Alexander says Sharperimage.com has been profitable on its own since it launched in 1995. Sales have grown from $200,000 the first year to $60 million in 2000, or about 14 percent of the company’s total sales. One reason for success, Alexander says, is that it offers more items online than in stores or in the catalog, therein taking advantage of the fact that the amount of shelf space on the Web is, theoretically, infinite.

"We view the Web as just another channel for customers to learn more about Sharper Image products," Alexander says.

A Penny Saved is a Business Preserved

When considering plans to expand overseas, Sharperimage.com thought about building a new platform that would allow consumers in Europe to buy products online in their own currencies. That had a certain logic, but according to Alexander, the new platform would have cost "tens of millions" of dollars. Instead, the company decided to sign up as a merchant with Yahoo, paying the portal a monthly fee (the size of which Sharperimage.com declines to reveal) to host its site in Germany, the United Kingdom and other European Union countries. Yahoo says it will host overseas online stores for a monthly fee that starts at $100 and rises depending on the level of inventory, says Nicole Kennedy, a company spokeswoman. "Getting an online business started in another country doesn’t have to cost a lot," Alexander says.

Now that venture capital has largely dried up for e-commerce, successful sites are looking for ways to feed the bottom line. Venture investment in the e-commerce sector fell from $843.4 million to $68.5 million?more than 90 percent?in the first quarter of 2001 as compared with the first quarter of 2000, according to a survey by PricewaterhouseCoopers and Venture One. "From the technology perspective there are ways to achieve efficiencies," says Ken Wei, vice president of strategy at Mainspring, a Cambridge, Mass., consultancy. In addition to seeking revenue sharing deals with portals such as Yahoo, e-commerce ventures can outsource their websites to offshore software programmers or outside consultancies. And although large companies may need an IBM or an Accenture to help develop their Web strategies and perform their integration work, smaller Web consultancies?such as Scient and Razorfish?that have suffered from the Internet downturn are offering some deep discounts, Wei says. Going with boutique Web consultancies may be risky given their precarious financial situations, but they could save you money, he adds.

Stupid Dotcom Tricks

In retrospect it all seems so clear: Don’t spend millions on Super Bowl ads when you can’t promise the customer anything more than he can get at the local pet store. Don’t offer to deliver candy bars for free. Don’t alienate your middlemen if you don’t have to (see "Make Friends with the Middleman," Page 94). Don’t weaken your brand by separating business channels. In other words, don’t follow silly business models.

Pets.com spent $180 per head in customer acquisition costs, according to Stern, Stewart & Co.’s Varma. For fiscal 1999, the year before Pets.com folded, the e-tailer had expenses?including whopping advertising and marketing budgets?that were 9.2 times its annual revenue of $5.4 million. In the end, the exercise of mailing 10-pound bags of dog food across the country was expensive, and the dotcom spent far too much on its promotion given the number of customers who wanted the service in the first place. Pets.com also failed to differentiate itself from physical pet stores, Varma says, relying exclusively on price instead of offering special services or an unusual selection. (See "Some Bark, Others Whimper," this page.) Now, the dotcom’s iconic mascot, the sock puppet, which it brought to rock star status with its $2 million Super Bowl ads, has become an emblem for fatuous failure and can be found for sale on Amazon.com for $8.96, marked down from a list price of $19.99.

Kozmo.com, the New York City-based company that delivered everything from Snickers to DVD players to customers’ doors, said it was close to profitability in certain markets when it was forced to shut down in April. In the end, however, profit margins were too thin and investors lost confidence. "The problem with Kozmo’s business model was that they could break even only when people made large orders frequently and people weren’t ready for that," Varma says. Kozmo officials blamed the dotcom’s demise on heavy spending on expansion early on when it should have carved out a smaller niche and focused on fewer cities. "The Web can’t make a poor business model successful," says Larry Perlstein, vice president and research area director for Gartner in San Jose, Calif.

But of course. Everyone knows that...now.

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Copyright © 2001 IDG Communications, Inc.

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