How Shutterfly Tapped Into Its Online Customer Community

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.

Keep Innovation Coming

Many of Shutterfly’s innovations have sprung directly from Housenbold’s finely tuned sense of community. Customers can create two personal webpages, for example, where friends and relatives can view and upload photos for everyone to enjoy and even make comments about them. To build community, Housenbold has introduced numerous photo contests involving pets, family reunions, hometowns, and school spirit, with Shutterfly products as prizes. But instead of offering big money and risk commercializing the experience, he shrewdly decided to keep the prizes modest.

Housenbold’s sense of community extends to his employees, whom he views as fellow innovators. Anyone with an idea is encouraged to submit a simple business-case presentation. Each idea is judged in terms of potential economic return and resource requirements. High-level screeners meet regularly to choose the winners.

When I spoke with Housenbold, he was about to join one such meeting to consider 13 ideas that had been winnowed from 85. He explained the workings of the process this way: “Let’s pretend someone proposes to roll out a new photo product, a picture on a tie for Father’s Day. We’ll ask, â¬ÜWould it help us differentiate? Is it on brand? Will it be in tune with our quality? What kind of investment would be required? Would it help smooth out our seasonality? How much demand would there be? How much would it cannibalize our other products?'”

Having this process in place has enabled the company to tap the fresh ideas brought by new people hired during the expansion of the last two years. Furthermore, the widespread organizational input has clarified workforce thinking, Housenbold told me. “There’s a shared belief that focusing on three to five ideas which will allow us to truly differentiate is the right approach to winning in the marketplace.”

Housenbold acknowledges that his leadership style requires a greater investment of up-front time and energy than a less formal approach would demand. “But I think it makes for better decisions,” he says, “and it allows decisions to be communicated and buy-in to happen in a much deeper way throughout the organization.” It also means that Housenbold has to build flexibility into his budget, allocating 10 to 15 percent for “trying things” such as a new go-to-market strategy or a new partnership. A certain number of failures are to be expected, he says, but “it’s the portfolio of those experiences that hopefully will lead us to learn and grow.”

The Right Partnerships

Partnerships and affiliations play a major part in Shutterfly’s growth strategy. In the first half of 2007, the company forged agreements with Yahoo!, Sony, Delta Airlines, Target, and David’s Bridal stores that include mutual promotional efforts and special customer offers. Target, for instance, will display Shutterfly photo books and greeting cards, and customers will be able to order prints online and pick them up at the stores an hour later.

When Baum and Manolis started Shutterfly, most of their start-up money came from Jim Clark, who had presided at the creation of Netscape, Healtheon, and Silicon Graphics (where Baum and Manolis had worked). But the new venture struggled for years, weighed down by a sour economy, the high-tech bust, and the inroads made by competitors such as Snapfish and Ofoto. When asked what kept Shutterfly going, Clark replied, “I did. It was a matter of money. I kept reinvesting. I don’t like to give up.” He served as board chairman until January 2007. Shutterfly began turning a profit in 2003, but by then the digital photo-printing market was splintering. Offline retailers such as Wal-Mart and Walgreens had jumped into the act, along with online giants AOL and Google.

Meanwhile, older rivals Snapfish and Ofoto were acquired by two deep-pocketed expansionists, Hewlett-Packard and Kodak. The future looked pretty bleak when Housenbold arrived with his wide-lens vision that would shift the frame of reference from photo finishing to social expression and community.

Housenbold’s performance was not a one-man show, of course. Others contributed their ideas. But it was Housenbold’s ability to view the company in a broader context that encompassed societal trends and provided the springboard for Shutterfly’s hugely successful reincarnation.

5 Tips for Rethinking Your Business Model

1] See the big picture. In some industries, business leaders, perhaps distracted by brand fame and a false sense of ownership, have lost touch with their customers’ needs. The magnitude of the opportunity in the auto industry was brought home to me recently when a group of Japanese auto executives discussed their corporate strategy. Their design, manufacturing, marketing, and business processes are all driven by one simple idea—building cars that consumers will love. A world of growth is open to the company that figures out what makes a car lovable today.

2] Build a community, but tend to business. The Internet is awash in businesses that built communities to feed the emotional or practical needs of their members. There’s nothing more exciting than standing at the intersection of community and commerce. Too often, though, these businesses fail to follow through on the second half of the equation. You can’t earn a profit unless you have a differentiating strategy and an efficient business model. Shutterfly has both, which is why it is among the few online communities that earn their keep by selling real products and services.

A lot of supposedly smart venture money is flowing into community-based Internet businesses such as YouTube and Facebook, which derive their profits from advertising. A less risky business model includes marketing some of the thousands of products and services that can be sold to Internet communities. The ultimate proof of the value of a product or service is that someone is willing to pay for it.

3] Widen your lens, but narrow your focus. Housenbold and I agree that the Internet favors a pure play, a company devoted to only one line of business. The sites that focus on a single market do better than those that spread themselves around. Compare Monster.com’s recruiting success to that of your local newspaper, where job openings are advertised along with dozens of other services. Or how about eBay‘s online auctions versus Yahoo!’s? A narrowly focused organization can channel its resources and energies more efficiently.

4] Organize for ideas. Just because ideas are ephemeral doesn’t mean you can’t apply the same kind of rigorous management attention to idea generation that you apply to product packaging. The ability to view your company in a new frame of reference is not limited to the executive ranks. Shutterfly has created a culture that puts a high value on employee suggestions. Most high-growth companies have adopted some form of process to capture ideas from the front lines.

5] Be persistent. It takes courage to move out of your familiar boundaries and play on a new field. If your company has been around for a while, your behavior might feel very risky. But success belongs only to those with the courage to stand by their convictions and risk failure all the way. After you’ve thought deeply about a big idea your company can execute, and after you’ve verified just how sleepy your competition is, don’t let anyone talk you out of charging ahead. Pursuing big ideas requires persistence.

Excerpted from Outsmart! How to Do What Your Competitors Can’t by Jim Champy (Financial Times Press, 2008). Champy is chairman of Perot Systems’ consulting practice and the author of numerous books about leadership and management.