Tag Archives: Accuship.com Inc.

About 4466 days ago E-Commerce

Look Who’s Making Money On The Net

realbusiness.com With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

Net Flix

realbusiness.com The Bootstrapper How do you compete with Amazon? By building a business the old-fashioned way Company: DVD Empire, in Warrendale, Pa. What it does: Sells DVDs and related products online Number of employees: 42 Conventional wisdom: You need to give your business away in order to compete in the big leagues. Unconventional wisdom: It is possible to bootstrap your way to dot-com success. Revenue growth: From $250,000 in 1997 to $16 million in 2000 Profit profile: Profitable since day one Capital: Start-up investment, $6,000; total capital raised to date, $6,000 There was a time not too long ago when people thought they could sell anything over the Web: furniture, gardening equipment, dog food, you name it. And, who knows, someday there just might be an online market for 50-pound bags of puppy chow and ceramic lawn gnomes. But if the past year has taught us anything, it’s that E-commerce isn’t as simple as throwing up a Web site and waiting for the inevitable flood of orders to pour in. Jeff Rix found that out when he started working for his father’s safety-equipment company, in 1994. Having caught the Internet bug while attending Bowling Green State University, Rix emerged eager to get Pro-Am Safety Inc. onto the Web. But after two years of trying, Rix found a less-than-enthusiastic online audience for the gas masks and fire extinguishers he was attempting to sell. In July 1997 a cyber-discouraged Harry Rix moved his son from Web development to outside sales, a transfer that left the younger Rix nonplussed. “He was grooming me to take over,” says Rix, referring to his father’s $11-million company. “I could have been set for life.” Instead, Rix took advantage of a chance discussion he had with his key programmer at Pro-Am, John-Michael D’Arcangelo. D’Arcangelo had recently purchased a DVD player — then a still nascent technology — and found a meager title selection at local stores. When D’Arcangelo visited www.DVDExpress.com (now Express.com), he deemed the site’s technology inferior to the E-commerce setup he had put in place for Pro-Am. At the time, only about 200 DVD titles were in circulation, but Rix and D’Arcangelo were betting that the technology would eventually replace VHS as definitively as CDs had replaced LPs. Plus, to their minds, DVDs were the perfect product to sell online: they were compact and uniform and therefore easy to store and ship. And the DVD demographic — then mostly technically savvy, affluent males — was the perfect candidate for Web sales. So in August 1997, using the technology they had developed at Pro-Am Safety and personal funds totaling $6,000, Rix and D’Arcangelo started DVD Empire as a side project. After taking in $250,000 in their first four months, they began to realize that their “hobby” was consuming more and more of their work time. So they quit their jobs at Pro-Am and moved to their own facility in February 1998. DVD Empire’s bootstrapped beginnings came from necessity but also from the urging of Harry Rix, a former Marine, who put up $2,000 of his own money for seed capital. “Harry runs his business very conservatively,” says Erik Ross, another former Pro-Am employee who joined DVD Empire as director of operations in June 1999. “Harry’s got a strong grasp of technology but also the hard-nosed business sense of someone who’s been through the sales ranks. That’s really given us perspective in a get-big-fast Internet world.” One especially important page the cofounders took from the elder Rix’s book was to keep everything in-house, from developing their own Web site and fulfillment database to setting up their own warehouse and shipping systems. Outsourcing didn’t make sense. “Depending on the relationship we have with the studio, we make about a 15% margin on each DVD we sell, and that’s really squeezing it,” Ross adds. Using a third party for fulfillment, for example, would cut that margin down another 5 to 7 points. “Now you’re down to less than 10%,” says Ross, “and when you factor in the number of orders screwed up and the people you’d have to employ to deal with them, you’re looking at 2% to 3%. And unless we got a ton of venture capital, we’d never get the volume to make 2% to 3% work.” Of course, the downside of keeping everything in-house is that inventory ties up cash, to the tune of $1 million in DVD Empire’s case, although Ross claims that the company turns that inventory an average of six to eight times a year. From the beginning, Rix and Ross followed a strategy that was wildly different from that of their competitors, many of whom took the venture-based, free-spending, low-margin, high-volume route. “Why should we spend $40 million on branding when there are only 10 million people with DVD players anyway?” says Rix. Adds Ross: “We decided that rather than spending on marketing, we’d put it all into the infrastructure to support the sales we were getting. We figured if we were growing any faster, we’d probably go out of business.” The test of that philosophy came soon and hard. The company ran into difficult times around the beginning of 2000, when its competitors — including Amazon.com, Reel.com, Buy.com, Express.com, and 800.com — engaged in an aggressive price war. “We noticed our growth rate started to slow,” says Ross. “We were used to 50% to 75% growth every month, and it went down to 25% to 30%.” Without outside funding, DVD Empire couldn’t cut its prices and survive. “We started second-guessing ourselves,” says Ross. Should they seek outside investment money? Spend more on marketing? “The worst part was knowing that there were life preservers all over the place,” he says, referring to the then-plentiful venture capital. “But we knew we didn’t want to go that way.” Their quandary ended — at least temporarily — when high-profile competitor Reel.com closed its doors, causing the rest of the industry to pull back from its price war. According to Chris Chiarella, an editor at Home Theater Magazine, Reel.com was simply one of the most notorious examples of the industry’s price-cutting absurdity. “The loss-leader concept has to be the exception, not your day-to-day way of doing business,” he says. By contrast, Chiarella says, DVD Empire’s strength was combining consistent, realistic pricing with timely shipping and good customer service. The infrastructure investment that the cofounders had committed themselves to making seems to have paid off. “Now we’re three E-Christmases into it, and everyone is spending money on infrastructure and customer service,” says Ross. “Well, we’ve already done that spending.” Now they’re ready to expand by adding products that are of interest to their existing customer base, like games for Sony’s new DVD-based Playstation 2. Still, the cofounders have no current plans to court outside funding. “We never say never,” says Ross, “but for the next five years we don’t foresee any scenario where we would.” DVD Empire’s diversification strategy has led the company in some unexpected directions. DVDs have a number of features unique to the medium, including director-commentary and foreign-language tracks, alternate takes, deleted scenes, and a multiangle feature, which allows viewers to change the direction from which they’re watching the action. The first segment of the video trade to take advantage of the multiangle feature was the adult-film industry. Curious customers began asking DVD Empire to carry certain multiangle-enabled titles, and the adult segment has since swelled to comprise 20% to 30% of the company’s business. Did Rix and Ross have any hesitation about carrying items that some customers might find offensive? “If our customers want it, we’re willing to sell it,” says Rix, although he adds that they took great care in segregating the adult titles onto a separate site. “Our tech-head following had no problem with it, and the price point is higher, so we make more money on it.” Does such a higher-margin product line have a deceptively positive impact on the company’s enviably positive bottom line? Rix admits that 60% of the company’s total net profits come from its adult division. “But we’d still be profitable without the adult merchandise,” insists Ross. “The biggest downside is it’s harder to hire for that part of the business.” Not to mention the fact that employees need to be extra careful about storing salacious materials. When this writer visited the company’s new facilities just north of Pittsburgh, an open box in a well-traveled hallway revealed a provocative promotional flyer for some of the product — much to the embarrassment of staffers who had intended to present a more family-friendly face. Still, Home Theater Magazine‘s Chiarella asserts that selling prurient material doesn’t have to be a black mark for the company. “As long as they police it fastidiously and make sure kids aren’t getting it, then people really have no right to complain,” he says. Of far greater concern to Rix and Ross is their remaining competition, some of it ailing (Express.com and Buy .com) and some seemingly stronger than ever (Amazon.com). Ross sees no reason why the DVD market can’t support more than one E-tailer. “Everybody seems to be forecasting against capitalism, saying it can only be a monopoly,” he says. “But I don’t really think you can squash every competitor, and I don’t think you have to.” Christopher Caggiano is executive editor of Inc. Technology. Ones to Watch The Inc. Technology staff considered quite a few companies for our “realbusiness.com” package. Most of the candidates ended up on the cutting-room floor. Some hadn’t been around long enough; others had great concepts that were yet to be proven. But a few companies (all founded in 1999) are starting with the right foundations in place. Here are some that we’ll be keeping an eye on. eKnitting.com, Berkeley, Calif. What it does: Sells yarn and knitting supplies to consumers. Founder: First-time entrepreneur Sarah Veit, a 28-year-old Stanford M.B.A. and inveterate knitter. How it makes money: Veit sells only the good stuff, from high-quality wools and cottons to more exotic silks and alpacas. “I have no desire to go head-to-head with Wal-Mart,” she says. What makes it “real”: A targeted niche market and tightly controlled finances. Veit conserved her precious marketing resources by attending the few trade shows that knitters flock to and advertising in the magazines she knew they read. Investment: A $150,000 SBA loan plus $350,000 in personal, family, and angel funding. Revenues: Projecting $500,000 for the fiscal year ending June 30, 2001. Profitability ETA: Profitable as of December 2000. Number of employees: 3. Why the jury’s still out: The company sells high-end products in a targeted niche. But it’s simply too soon to tell whether eKnitting has its market sewn up. Tutor.com, New York City What it does: Helps students find online or in-person tutoring in 400 subjects. Founder: CEO George Cigale, previously vice-president of the Princeton Review. How it makes money: Independent tutors charge students fees averaging $30 an hour; the company takes 10% of each transaction plus $1. What makes it “real”: The company struck partnerships with brands like the Princeton Review and Scholastic Inc. to attract students and tutors. By early 2001, with no advertising, Tutor.com had registered 25,000 tutors and averaged 20,000 tutoring transactions a month. The company plans to expand its reach by offering real-time homework help, services for adult learners, and licensing deals for school districts. Investment: $16 million in venture capital in 1999 and 2000; projecting another $15-million round late in 2001. Revenues: Less than $100,000 for 2000; shooting for $5 million in 2001 as new partnerships and expanded services take effect. Profitability ETA: Fourth quarter of 2001. Number of employees: 30. Why the jury’s still out: No serious revenues for 2000. MrSwap.com, San Francisco What it does: Gives consumers a forum for swapping used CDs, DVDs, and video games. Founders: Patrick Ford, a marketing veteran who worked at Microsoft and several Internet companies; Robert Kohler, a lawyer and veteran company founder. How it makes money: By charging swap recipients a “shipping and handling” fee for each transaction ($2.99 per CD, $4.99 per DVD, and so forth). The company also sells new merchandise for swappers who can’t find the used items they’re looking for. What makes it “real”: Among numerous Web-based swapping sites, MrSwap has a model that works. Its customers earn “SwapPoints” for the items they list, which they in turn use to “buy” the items they desire. Ford and Kohler have outsourced almost everything, including the fulfillment of the shipping and postage materials customers use to send items to one another. Investment: $750,000 in seed financing; $3.4 million in venture capital. Revenues: Under $1 million in 2000. Profitability ETA: November 2001. Number of employees: 15. Why the jury’s still out: The swap concept has a catch-22: In order for the swapping mechanism to work, the company has to attract a critical mass of users. But to attract those users, it needs to have sufficient swappable merchandise. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

Sit! Stay! Make Money! Good Company

realbusiness.com The Mom-and-Pop A tiny business that sells dog supplies on the Web pulls in profits while big pet dot-coms take a poop Company: SitStay GoOut Store Inc., in Lincoln, Nebr. What it does: Sells high-end dog supplies like the gumball- machine-style Yuppy Puppy Treat Machine, $29.95 Number of employees: 4 humans, 4 canines Conventional wisdom: It’s impossible to run a profitable pet site. Witness well-funded fizzles like Pets.com. Unconventional wisdom: A niche market, bootstrapped financing, and over-the-top customer service make dog supplies a profitable venture for a husband-and-wife team. Revenue growth: From $85,000 in 1997 to $888,000 in 2000 Profit profile: Profitable from year one. In 2000, profits were $111,000 on $888,000 in sales. Capital: $20,000 from the couple’s 401(k) investments The telephone is just about the only thing at SitStay.com that doesn’t bark. The clock barks the hour. The warehouse doorbell barks. The computer barks when a customer enters the chat room. And, of course, the four resident dogs — Kari, Bruno, Dancer, and Tilli — all bark. The telephone, however, still rings, and when it does, owner Darcie Krueger answers it with a lilt, not a bark. SitStay.com (aka SitStay GoOut Store) began as a hobby for dog-lovers Darcie, 46, and her husband, Kent Krueger, 41. The pair originally launched a Web site for Belgian-shepherd aficionados. Belgian owners came to rely on the Kruegers for product advice. Darcie soon realized that the hobby site could be a business. Today the company has 19,000 customers worldwide and nearly $900,000 in sales. “People always want to know ‘How did you do it?” says Kent. “We did it by accident.” That may be how the Kruegers like to think about their Internet company. But their success is no accident. SitStay exhibits all the traits of a well-run start-up and none of the hallmarks of a stereotypical dot-com. Drawing on 15 years’ experience in information technology, Kent built the site single-handedly. Darcie’s background in managing retail stores turned her into a service crusader willing to spend an hour on the phone giving training tips to a single customer. The pair have dug themselves a cozy, high-margin niche market. They generate business by word of mouth — unlike big E-tailers that spend millions building brands. And they bootstrapped the company by upgrading software, phone systems, and warehouse space only as cash flow permitted. “I’m not risky with money; I’m risky with ideas,” says Darcie. That’s hardly surprising, given her previous employment. Darcie quit her job as a city risk-management worker and went to work on SitStay full-time in February 1997. In October, Kent left his position as an information-services supervisor for the Lincoln Electric System. As if quitting their jobs weren’t enough, the couple took $20,000 out of Kent’s 401(k) plan. At that point Kent’s dad proclaimed, “You’re nuts.” Though the Kruegers had a head start on a customer base, they needed products to sell and employees to sell them. But instead of staffing up without the sales to pay the salaries, the couple worked around the barking clock until August 1999, when they hired Darcie’s son, Sean Kusek, to pick, pack, and ship orders of Icelandic fish-skin chews and Wiggly Giggly balls. (Sean’s wife, Amy, took over when Sean went back to college, in January 2000.) As last year’s holiday season approached, the Kruegers hired a fourth employee. As for stuff to sell, the Kruegers asked M.I. Industries, a Lincoln manufacturer of all-natural pet treats, if SitStay could sell its high-protein goodies. The company agreed but eyed the basement start-up warily, taking cash for the first order — a single box of Macho Stix. (The aptly named treats are made from the male sex organs of beef cattle.) Little by little, SitStay’s inventory expanded to fill the basement, then the garage, then a 3,000-square-foot office and warehouse. Little by little, the treat manufacturer extended its terms. Now SitStay sells $16,000 of M.I.’s products in a month, and M.I. president Bob Milligan doesn’t give SitStay’s credit a second thought. “You know the check’s coming,” he says. Unlike the big pet E-tailers that try to be all things to all animal owners, the Kruegers limit their offerings to a relatively small collection of products that, like Macho Stix, meet their personal standards of what’s good for dogs. Margins on their 1,500 SKUs range from 15% to 100%. “We don’t have 10,000 products,” says Kent. “We have the best of the best.” Indeed, when it comes to E-commerce, small is beautiful, says Tim Fogarty, an E-commerce research analyst at Thomas Weisel Partners, a San Francisco-based merchant bank. “Who sells the most? EBay,” he says. EBay and Amazon’s zShops introduced myriad small sellers to a vast community of buyers, Fogarty says. Though the public doesn’t hear much about them, the small shops are running the E-commerce factory. But they’re too tiny to compete with a supermarket or a big-box retailer on high-volume, low-margin commodities — particularly in the pet industry, with freight-heavy items like bargain-brand kitty litter and dog food. In such a fragmented field, “what’s really important is to find a niche and grow within that niche,” says Funda Alp, spokesperson for the American Pet Products Manufacturers Association, in Greenwich, Conn. Go too broad and you risk going belly-up, like the former employer of a certain illustrious sock puppet. “Pets.com created great brand awareness, but their business model was all pet products at a discount on the Web. No one has made that work yet,” says Andy Pierce, vice-president of branding strategy at Mercer Management Consulting, in Lexington, Mass. According to Greg Kyle, president and CEO of Pegasus Research International, in New York City, Pets.com sold items for less than what it had paid for them. Add shipping costs, and the company lost $277,000 on about $9.3 million in sales in its last quarter in business. The self-funded Kruegers don’t have the luxury of losing money on sales. But last fall, the Kruegers’ approach didn’t stop SitStay customer Donna McKay (and numerous others) from fearing that Pets.com’s failure would presage SitStay’s untimely death. McKay posted this message on SitStay’s online forum: “Ever since I heard about the demise of Pets.com, I’ve been worried about SitStay. Is there something we should be doing to ensure its viability?” After a flurry of similar postings, Kent replied, “Let me put your minds at ease. SitStay.com isn’t going away. We’re like the tortoise. We just keep on going while the hares are running out of steam.” After four years in business, the Kruegers still like their steady pace and don’t want any venture capital with its attached strings. They have already spurned one suitor. And no, they’re not crazy. “Companies that adopt a risky strategy of growing as quickly as possible without any thought to the bottom line or profitability haven’t managed their growth effectively,” says Pegasus’s Kyle. Instead, the co-preneurs envision growing to $25 million and 25 employees in five years on their own terms. They’d consider a microcap public offering in which they’d retain the majority of stock. SitStay’s biggest challenge will be succession. Someday Darcie won’t be able to handle all the phone calls herself. Someday Kent will want to take his motorcycle out for more than half a day’s ride. Realizing that their business could play dead — for real — without them, the Kruegers are beginning to work out a plan. “As we grow, we’ll cross-train the employees” so that they can take over if necessary, Darcie says. “We’ll still be the soul of the business, but we won’t be the heart anymore, and it can go on beating without us.” With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

E-Tailing By The Numbers

realbusiness.com The Scorekeepers What’s the key to successful online sales? First you find a great niche. Then you set rigorous numerical standards and stick to them Company: Shoebuy.com, in Boston What it does: Sells shoes online Number of employees: 8 Conventional wisdom: Everybody knows that E-tailing is dead. Just read the papers. Unconventional wisdom: Executed well, the E-tailing model can yield healthy profits. Revenue growth: $1.8 million in 2000; more than $30 million projected for 2001 Profit profile: Founded in April 1999, the company first turned a profit in January 2001. Capital: Start-up investment of $200,000 in personal funds; $2.3 million from angel investors Selling shoes online. It’s the kind of business you’d expect to be the brainchild of a fashion maven with a closet full of Manolo Blahniks. But Scott Savitz and Craig Starble couldn’t care less about shoes. What turned the two investment bankers on to peddling oxfords online was the opportunity to use their quantitative skills to test whether E-tailing could really work. In early 1999, Savitz and Starble were working at BankBoston (now Fleet Bank). Starble, now 38, was managing global treasury funds, while Savitz, 32, specialized in individual investments. Investment bankers, says Savitz, take a “very formularized approach to recognizing value in any opportunity,” adding that he himself was always conservative with his clients’ funds. “We never went for home runs,” he says. “We aimed more for singles.” As the pair witnessed all the start-up activity in E-tailing, they decided to take a shot at it themselves. But what exactly would they sell? At the time it seemed as if almost everything that you could conceivably sell online was already being sold there. But no one appeared to be selling shoes over the Internet, at least not in any major way. Which, of course, made them wonder why. Would consumers buy shoes without trying them on first? “Until about the fall of 2000 we tried to talk ourselves out of doing Shoebuy,” says Savitz. “But the more we did the numbers, the more it made sense.” What made particular sense to them was that the people who were already buying $2.5 billion worth of shoes through mail-order catalogs would almost certainly be open to shopping for them online. As Savitz and Starble made their calculations, they came to believe they had uncovered what Savitz calls “a hidden gem.” It seemed that if shoes were sold right, they could bring in extraordinarily healthy profits. Typical shoe retailers, says Savitz, start with about a 100% markup, but that usually whittles down to a 3.5% net margin after they deduct all their costs. Savitz and Starble were determined to eliminate as many of those costs as possible. To entice potentially reluctant shoppers, they decided to offer free shipping. But even after subtracting that cost and salaries for customer-service, technical, and business-development personnel, they were left with a staggering — albeit still theoretical — 30% net profit. Savitz was determined to maintain that 30%, which to him meant that the company would have no sales force, no inventory, no warehouse, and as few employees as possible. It would be, in other words, a virtual organization. “The virtual company was supposed to be the promise of the Internet,” says Savitz, “but somehow that got lost for a lot of people along the way.” Maintaining a warehouse and inventory would erode their precious margin by 18 points. Moreover, says Savitz, by holding inventory Shoebuy would incur the exposure to loss from radically changing trends in footwear. Adding a sales staff would cost the company another 10%. For that reason, Savitz says, he has no plans to add to his staff of eight at any time soon. “We just have to make sure we never spend more than our model will allow,” he says. “Otherwise it won’t work.” Armed with what they saw as a terrific market potential and the chance to land some hefty margins, the partners set out to use their quantitative skills to manipulate those numbers to their advantage. The number that in the end would matter most: the lowest customer-acquisition cost possible. One afternoon last fall, Savitz sat at a folding table in Shoebuy’s modest corporate office in Boston’s financial district, animatedly describing his passion for keeping customer-acquisition costs low. He briskly rattled off a series of well-known online players and the average amounts he had estimated that they spent to snag a single sale: Amazon, $103; Bluefly.com used to be $245 but got it down to $58. And the now-defunct Garden.com, Pets.com, and Furniture.com had struggled along at $71, $200, and $500, respectively. Savitz wouldn’t allow Shoebuy’s figure to rise above $15. He chose to keep marketing costs low by establishing alliances with shopping sites and striking customer-share deals with highly focused E-tailers. He also scored a cobranding coup: Shoebuy was featured prominently in a MasterCard ad that appeared in fall and winter 2000 issues of Bon AppÉtit, Martha Stewart Living, and Gourmet magazines, among others. The ad didn’t cost Shoebuy anything up front, although customers received a discount by using Master-Card for their Shoebuy purchases. The other number that would make or break Shoebuy would be what Savitz calls the company’s “fulfillment metric” — how fast manufacturers could get their shoes to Shoebuy’s customers. But before he could determine what that number should be, Savitz had to persuade manufacturers to drop-ship shoes from their own warehouses. Typically, shoe manufacturers receive shipments from overseas factories in large crates, which they then ship to retailers. To work with Shoebuy, vendors must set up a consumer-direct fulfillment system from scratch, a process Savitz says has been arduous at best. Even after Savitz signs up a vendor to sell its shoes through Shoebuy, it can take up to six months to get its product on the site. Mike Kormos, president of Footwear Consulting Group, in Nashville, says it’s no surprise that Shoebuy has met with resistance. For one, he says, manufacturers fear channel conflict. More important, says Kormos, is the traditional, hidebound nature of the footwear industry. “There’s typically a lethargy in adopting new technology,” he says. Savitz says that manufacturers have gradually embraced the Shoebuy concept. One thing that’s worked in Shoebuy’s favor has been the attraction of one-stop shopping. “It’s hard to make money on the Web when you’re only selling a single brand,” says Savitz. But what really convinced manufacturers of Shoebuy’s value, says Savitz, was their own botched E-tailing efforts. “Some companies have tried selling online on their own,” he says. “And they’ve seen what a costly procedure it is, from building the site to installing in-house customer service. It actually becomes a losing proposition for them.” Savitz admits that launching the company would have been a lot easier if it had maintained its own inventory. “But then you start taking away all the things that make our business model so appealing,” he says. Under its current system, Shoebuy can offer a selection of products that would have been impossible if the company had kept its own inventory. The arrangement is also good for cash flow. “We don’t pay for shoes until after we sell them,” says Savitz. Savitz believes that Shoebuy’s cash-flow advantage explains why the company is still around and onetime competitors like MyFavoriteShoe.com aren’t. “They immediately went out and put good names on the site, signed deals with the Bruno Maglis, and bought a boatload of inventory,” he says. From Savitz’s perspective, that approach was flawed. Even if the folks at MyFavoriteShoe had perfectly forecast their prospective customers’ buying patterns, they still would have tied up their cash for six or seven months while they waited for their inventory to sell. Shoebuy takes on a limited number of each new manufacturer’s products on a trial basis. Companies that sign on with Shoebuy agree to ship shoes within an average of three to five days after an order has been placed. “We can’t explain to the customer that it wasn’t us; the manufacturer screwed up,” says Savitz. He and Starble monitor each manufacturer’s sales history, and unless a particular style meets their sales expectations, it comes off the site. Given Savitz and Starble’s careful calculations, Shoebuy’s 2001 revenue projection seems jarring: somewhere north of $30 million, up from $1.8 million in 2000. How can the founders justify such a “hockey stick” trend line? “We’re in a very scalable position,” says Savitz. “We have a large market with virtually no competition and more than $60 million in ‘inventory’ available on the site. We have the infrastructure to sell at that rate, but we don’t have the actual inventory risk.” Savitz admits that if the company stays at its current run rate, 2001 revenues will be closer to $4 million. “But we went up over 100% from third to fourth quarter 2000 without hiring anyone, and that momentum hasn’t stopped,” he says. But for the company to make those projections, will Savitz and Starble need to seek additional outside funding? “No, but we probably will anyway,” says Savitz, “because the environment is so good for acquisition targets.” Possible candidates might sell similar or complementary items that Shoebuy could roll into its model and scale up appropriately. “But we will never hold inventory, and you can quote me on that,” emphasizes Savitz. “I can’t see that we’d ever go against our model or abandon the metrics we’ve established.” With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

A Bright Future: After the Train Wreck

realbusiness.com Commentary: E-tailing A four-time entrepreneur explores the realities of retailing, both on and off the Web. He finds out that they’re the same As the Great Internet Crash of April 2000 approaches its first anniversary, E-tailers are still clearing away the twisted, scorched ruins of business plans and high hopes, trying to see if E-tailing has a future and, if it does, what that future may look like. But it’s tough seeing beyond the carnage. At year-end 2000, New York recruitment firm Challenger, Gray & Christmas estimated that more than 41,000 workers had lost their jobs at Internet companies. People who were tracking the disaster, such as reporters at the trade journal The Industry Standard, counted at least 135 company deaths by mid-December. A handful of the high fliers left alongside the tracks are now so well known that their names have become synonymous with Internet failure: Pets.com, ToySmart.com, Chipshot.com, Eve.com, Furniture.com, Kibu.com, and Productopia. Less spectacular deaths are chronicled on the let’s-not-mince-words site Fuckedcompany.com. And no one tracks the disappearances of the one- and two-person sites, bootstrapped by entrepreneurs who quietly said good-bye. But despite the stream of obituaries, E-tailing is alive — and it has a bright future. As I was writing this, industry and brokerage analysts were unwilling to draw up a definitive list of winners and losers, but all were amenable to sharing their thoughts on what sorts of smarts will lead an E-tailer to success. “E-tail is not different from retail,” says Dan Levitan, cofounder and managing partner of Maveron Equity Partners, a Seattle-based venture-capital firm that backed eBay and Drugstore.com. Levitan emphasizes that a successful retailing operation on the Web must adhere to the same key management practices as a brick-and-mortar retailer. “The Internet is technology that empowers retailing, but technology alone is not reason enough for people to buy,” he says. “You must be customer focused, not product focused, and you must pay attention to the details.” His argument is merely common sense: all retailers — whether on the Web or off — must tightly control expenses, keep a lid on customer-acquisition costs, and, above all, ensure bottom-line profitability. This back-to-basics message, obviously, is good news for millions of successful business owners who experienced a profound sense of dislocation throughout the “Internet bubble” years of 1998 and 1999, when common sense and good management were so out of style. “For a time the marketplace was sending irrational messages to managers. Those who listened to the messages got destroyed,” says John Hagel III, a former partner with McKinsey & Co., who believes he has divined the mysteries of E-tailing success. He’s putting that insight into practice now as chief strategy officer of 12 Entrepreneuring ( www.12.com), a venture-funded E-tailing start-up that was in stealth mode when I talked with him. E-tailers have to assess whether the products they want to sell are appropriate for the Web. Not all are. According to Levitan, Hagel, and others, some of the now-discredited and oh-so-irrational messages included the notions that entrepreneurs could build valuable businesses by giving everything away, that merely attracting “eyeballs” would lead to success, and that consumers wanted the latest whiz-bang technology and would put up with extreme inconvenience to spend time on a site that offered a cool experience. But given that reality is now back in fashion, what rational attributes and practices will replace the irrational and get the successful E-tailer on the right track to future profits? First, E-tailers have to assess whether the products they want to sell are appropriate for an online store. Not all are. “A high ratio of value to shipping costs is important,” says Hagel. For that reason he particularly favors online enterprises that help customers do such things as download software, purchase airline tickets, and trade stocks. A high value-to-shipping-cost ratio is also a key reason that books, music, videos, and DVDs do so well online and sofas and kibble do not. “It can be a logistical nightmare to ship a bag of dog food to a customer’s home and try to generate a profit from that,” Hagel notes. However, even if an item lends itself to online sales, market factors often make it a bad choice for entrepreneurs, especially if the product has only a few producers. At first glance, high-priced cosmetics might seem to present excellent online sales prospects, but Hagel points out that Estee Lauder controls much of the upper-end market and keeps an iron grip on distribution, putting its products out of reach for most Web E-tailers. That was a lesson learned the hard way by Beautyjungle .com (out of business), Gloss.com (bought by Estee Lauder), and Eve.com (acquired by Sephora.com, a site owned by luxury-goods company LVMH, which tightly controls its own products). 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. In addition to providing lock-ins, Amit says, companies can offer customers products that complement the one they just bought. For example, European-travel company E-Bookers offers its customers convenient access to information about such things as weather and currency rates in the countries they plan to visit. Likewise, Road Runner Sports’ site ( www.roadrunnersports.com) specializes in selling running shoes but also offers running clothes, timers, sports drinks, fitness calculators, heart monitors, and even framed art oriented toward the runner. The company’s Run America Club creates its own lock-in by offering customers a 5% discount on regular catalog prices, a free magazine, and E-mail notifications of specials. A growing type of complementary marketing can also be found in the so-called “bricks and clicks” sector — established brick-and-mortar retailers that have launched E-tailing sites (Kmart and Bluelight.com, for example) and pure-play E-tailers who link up with complementary off-line retailers. Levitan cites Drugstore.com’s relationship with Rite-Aid as a prime example of a complementary brick-and-click relationship. Drugstore.com shoppers can order prescription drugs online for same-day pickup at a Rite Aid drugstore and get the pharmacy-benefit coverage provided by the insurance companies with which Rite Aid has relationships. Levitan also stresses the importance of offering Web visitors what he calls an “aha!” moment. For instance, Drugstore.com could provide “something your physical pharmacist would not or could not do,” he says. That might include creating a list of all the products the customer has bought before, which makes it easy to reorder the same items. “The site already has an online prescription-recall alert that can send you an E-mail regarding FDA actions,” Levitan notes. Successful sites must seek to do more than just emulate brick-and-mortar retail models. They must use technology not for its own sake, but to solve a compelling need and provide a valued service that can’t be replicated in the physical world. The future of E-tailing, then, looks a great deal like retailing, only enhanced by new technology. In reality there is no old economy versus new economy. Profits matter; customers reign; solid business practices still trump flaky fantasies that sell $5 bills for $4 and try to make up the difference in volume. But the Internet has made E-tailing a globally competitive environment in which, more than ever, the entrepreneur has to do everything right. Bad site design and slow downloading equal no customers. The SitStays of the world will need that affiliate program; Shoebuy might want to think about selling socks or shoe trees; DVD Empire might want to bundle some discount videotapes, since VCRs are still grinding away out there. All three of them might want to see what sorts of deals they could work out with brick-and-mortar merchants. And the lessons they learn will be repeated a million times over as companies move faster than ever in the race to remain among the quick and not the dead. Lewis Perdue is the author of 18 books and has founded or helped launch four technology companies. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

Express Delivery

realbusiness.com The Traditionalist After years of cautiously building a business by the book, Accuship’s Mason Kauffman pulls out all the stops in a race to rule the online logistics market Company: Accuship Inc., in Germantown, Tenn. What it does: Lets companies compare various shippers’ services and prices online; processes and tracks delivery orders; handles billing and service auditing, accounting, and payment Number of employees: 100 Conventional wisdom: Who needs an intermediary on the self-service Web? Unconventional wisdom: Middlemen like Accuship can thrive online; who doesn’t need a one-stop spot for shipping options? Revenue growth: From $18,000 in 1994 to $3 million in 2000; $9.7 million projected for 2001 Profit profile: 2% in first year; highest percentage profit, 21%, in 1997; planned loss in 2000; projects 20% profitability for second half of 2001 Capital: Start-up investment of $100 in personal funds; founder took no salary for first year; $7.6 million in one round of private funding in 2000 It’s been nearly 25 years, but Mason C. Kauffman still remembers the first pearl of wisdom he ever got from Federal Express founder Fred Smith. “He said, ‘If you want to create a business, go to a party and listen. You’ll hear people complain,” Kauffman recalls the legendary entrepreneur telling his University of Memphis M.B.A. class back in the mid 1970s. Every complaint, Smith said, equals a need, a problem, a vacuum. Meet it, solve it, fill it — and there’s your business. After graduating, Kauffman signed on with Federal Express, where he spent 16 years in sales, operations, engineering, and information-management jobs. He learned plenty about Smith’s approach to the shipping and logistics business. But at 40, when Kauffman yearned to start his own company, he found himself drawn back to Smith’s advice. So he listened . And he heard complaints — lots of them — from companies seriously frustrated about every aspect of shipping: the sheer number of carriers; the broad range of services, rules, and costs; and the complex and constantly changing shipping process itself. Most businesses, Kauffman figured, could use expert guidance in finding faster, cheaper, and easier ways to ship, and account for, their parcels. So in 1994 he left his $100,000-a-year FedEx job to found Express Logistics Inc., a consulting business that helped companies streamline their shipping operations. Today the company (renamed Accuship.com in 1999 and plain Accuship late in 2000) works like a travel agent for parcels. The company provides its customers — mostly big corporations like the Coca-Cola Co., Sprint, and Home Shopping Network Inc. — with one online source for shipping and tracking (as well as optional accounting, auditing, and bill-payment services). At Accuship’s Web site, users can compare options and prices to decide whether, say, to pay one shipper’s $40 fee for delivery by 8 a.m. or another’s $8.75 charge to get the package there by 3 p.m. They can also arrange for same-day couriers, print labels, track deliveries, and check invoices — all online. Accuship takes a flat monthly fee or charges per transaction; the company’s share works out to 20% to 50% of its customers’ savings on shipping costs. In many ways, Accuship is a virtual company. Because it doesn’t do the actual shipping, it owns no planes, trucks, or warehouses. And all transactions — about 850,000 a day, worth a daily average of $5 million — have always been electronic, initially through electronic-data interchange and more recently over the Web as well. But in several key ways, the company seems more rooted in the old economy than in the new. First, at age seven, Accuship is, by Internet standards, a granddaddy. Unlike most of its dot-com brethren, it’s been at least slightly profitable for much of its life (ranging from 2% on revenues of just $18,000 in its first year to a high of 21% on $895,000 in 1997). In another Web-world rarity, Kauffman started Accuship with his own savings and didn’t receive any outside funding until the business was six years old. He worked alone in the attic of his home for the first year, taking no salary. After that, he built his staff slowly, making sure he had new accounts in the pipeline before he hired people and funding expansion through cash flow. Finally, even at the height of the Internet inferno, he hired no dot-com executives and imported no one from Silicon Valley. But even Kauffman will admit that the company’s more recent financial picture would raise eyebrows at any traditional business. First, Accuship lost money last year even as revenues increased 36%, reaching $3 million. (Kauffman emphasizes that 2000 was “a planned-loss year” because of major technology and staffing expenditures.) And the company turned to outside investors for the first time, receiving $7.6 million in a single round of private funding in May 2000, two months after its sixth birthday. But, again unlike many other dot-com CEOs, Kauffman expects to recoup his investment quickly and says he’s on track for 20% profitability for the second half of this year. Kauffman funded the company’s expansion through cash flow and made sure that he had new accounts before he hired people. The capital infusion is part of Kauffman’s plan to make Accuship the biggest player in its field this year, adding new Fortune 1,000 clients and expanding to new countries every week. To that end, Kauffman invested heavily in the company’s staff, technology, and Web site in 2000. All those changes represent a marked departure from the CEO’s earlier mantra of growing cautiously. Why so aggressive, and why now? “Timing,” Kauffman says. In the past year, most Fortune 1,000 companies have gotten enough bandwidth — and enough confidence about data security — to feel comfortable about handling internal business on the Web. At the same time, with the economy contracting, many companies have scrutinized expenses and discovered that they have been literally wasting a fortune on shipping. By mid-2001, “somebody will lead this market,” Kauffman says. He’d like it to be his company. So that made 2000 just the right time to invest in the fuel needed to propel Accuship to the top of the heap. And an impressive heap it is: online logistics, currently a $42-billion market, could reach $274 billion by 2004, according to Bear Stearns & Co. In fact, electronic logistics “will ultimately determine which old- and new-economy companies will survive and prosper and which companies will fail in their ability to distribute their product and services to an increasingly ‘plugged-in’ marketplace,” Bear Stearns analysts wrote in a June 2000 report on the industry. Bear Stearns praised Accuship in particular for its exclusive business-to-business focus and its customer roster, which includes names like Verizon Communications and Reebok International Ltd. “If Accuship continues to demonstrate shipping savings for such large companies, its customer list could grow substantially,” analysts wrote in the report. Accuship also won top marks from Armstrong & Associates, a logistics consulting firm in Stoughton, Wis. In a 2000 report titled Who’s Who in Logistics Web Sites, the consultants gave Accuship an A, its highest rating, which indicated that the company had “a high probability of survival,” says company vice-president Evan Armstrong. The firm based its rating on Kauffman’s FedEx background, his strong management team, his ability to get funding, and his company’s powerful Web site. Also, Armstrong says of Accuship, “they have a solid customer base, they have a real revenue stream, and if they do need additional funding, they’re likely to get it.” Kauffman says that as he expands his customer list, he doesn’t want to do it all at once. “This year is going to be a very big one for us,” he predicts. “But growth can kill companies. So I’m reminding everyone that we can’t be in every country tomorrow and we can’t be in every company tomorrow. Timing is everything.” Anne Stuart is a senior writer at Inc. Technology. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

Not Dead Yet

realbusiness.com Commentary: Intermediaries Like the resilient peasant in the famous Monty Python scene, intermediaries on the Internet are suddenly feeling much better Just a year or so ago, conventional wisdom about middlemen on the Web went like this: Soon, there won’t be any. The underlying thinking, of course: The Web lets sellers talk directly to buyers, without agents, brokers, distributors, wholesalers, or even retailers. Why fool around with intermediaries when you, the seller, can deal directly with your ultimate customers or when you, the buyer, can go straight to the source? Cutting out those middle layers creates what Bill Gates, in his 1995 book The Road Ahead, famously termed a “friction free” business environment, permitting direct, effortless, one-to-one E-commerce. The Web, according to those ancient theories, would quickly lead to widespread extinction of entire professions: insurance and travel agents, real estate agents and stockbrokers, car dealers, computer retailers, even (or maybe especially) the editors and reporters who choose and package news. With the Web, you can trade your own stocks, book your own trips, configure your own new car or computer, buy your computer directly from the manufacturer, and report and disseminate your own news. The theory got its own spelling-bee stumper of a buzzword: disintermediation, meaning that nothing stands between producer and buyer. “Two’s company, three’s a crowd,” KPMG analyst Bob Westrope observed just two years ago, calling the predicted shortening of the supply chain “a shift in the structure of our economy not seen since the dawning of the industrial age.” As it turned out, the greatly exaggerated death of the middleman ranks among technology’s champion myths, almost as big a no-show as the Y2K bug. Intermediaries live, and many are thriving. As Michael Hammer of Hammer and Co., in Cambridge, Mass., points out, the Web hasn’t destroyed or replaced most intermediaries’ jobs. But it has transformed them. The new-millennium middleman understands that customers — both businesses and consumers — actually prefer working with intermediaries who add value to whatever they’re buying. Typically, Hammer says, that value is information, whether the product in question is a life-insurance policy, a BMW, or a Caribbean vacation. And in most cases, he adds, you’ll get that information not from the producer but from the middleman — the insurance or travel agent or the car dealer. (Even if you buy a car online, who are you going to call for a test-drive, service, or recall work? Certainly not a Web site.) That’s why, for instance, I researched my recent trip to St. Martin online but booked the flight and the hotel through my favorite travel agent, who’d been to that island three times. (She also got us a deal that was much better than any of the ones I had found on my own.) Cutting out the middleman has always sounded like an honorable idea — the right thing to do. In theory, at least, setting up a direct link between buyer and seller improves communication, saves time, reduces waste, and cuts costs. But some of those who have gone that route have quickly found themselves mired in new problems. Many start-up owners who dream of dealing directly with their customers have wound up instead in a logistical nightmare — realizing, for instance, that they can’t handle their own warehousing or distribution. Some major manufacturers have found they simply can’t win by competing with their own partners. In one well-publicized case, Levi Strauss mollified its angry retailers when, late in 1999, it stopped selling products on its own Web site. And being the target of such hostility is hardly the purview of only large companies. Bob Duncan, CEO of American Leather, a far smaller manufacturer than Levi Strauss, was labeled by a retailer as an “unethical, two-faced liar driven by insatiable greed” when the retailer assumed that Duncan was promoting the company’s furniture for sale over the Web. (See ” First Do No Harm,” Inc. Technology, No. 1, 2000.) In a similar vein, writer Stephen King hit a few snags in his attempt last year to bypass publishers and bookstores by selling his novel The Plant online in serial form. King said he’d continue writing the novel, about a vine that takes over a publishing company, as long as 75% of those who downloaded it paid $1 or $2 for each of 10 installments. But by year’s end, with only 46% of his online readers paying up, King posted Part 6 free of charge. He later put the plan on hold indefinitely, saying that he needed to devote time to other projects. Ironically, King notes in an explanation on his Web site, dozens of would-be readers told him they’d be happy to buy The Plant when it’s really published — in standard book form. (King, however, still considers the self-publishing experiment a success, citing gross sales of more than $600,000 — with no printers, publishers, or agents to pay.) The new-millennium middleman understands that customers actually prefer working with intermediaries who add value to whatever they’re buying. In fact, some of the Web’s most successful companies have been intermediaries. Search engines like Yahoo serve as middlemen between people who are seeking something and people who are offering to provide it. EBay, the pioneering auction site, offers buyers and sellers a way to find each other online. Then there’s service. The Web’s most lasting legacy may be that it’s created an expectation of 24-hour help, in person, in real time. In a 1999 survey, Forrester Research, in Cambridge, Mass., found that more than a third of people who bought something online requested service at some point during the experience. In other words, being able to buy the product or service anytime wasn’t enough; nor was it enough to be able to contact customer service later if there was a problem with the purchases. From the moment people log on to a Web site, Forrester concluded, they expect to be able to turn to other people for help. But that expectation creates new opportunities, too. Service is, in fact, the new differentiator, as Geoffrey Moore writes in Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet. “Even the most product-centric of companies — automobile manufacturers, factory equipment vendors, and raw materials providers, real atom guys — are now assigning their best and brightest to the task of differentiating on services,” Moore writes. Customers increasingly place a high value on companies that offer one-stop shopping — access to a range of services in a single location. That, analysts say, bodes well for companies like Accuship.com, a Memphis-area company that shows its corporate customers all their price and service options for shipping packages. (See ” Express Delivery.”) Accuship is, in fact, a prime example of a trend highlighted in a 10-year business forecast prepared in 1998 by the Institute for the Future. The concept of disintermediation is “a mirage,” futurist Paul Saffo writes in that report. “It’s directly at odds with what is actually happening.” In fact, Saffo writes, the Internet and other technologies “enable new kinds of transactions, which lead to new market niches and, overall, make the market environment more complex.” Such changes will, of course, kill off some intermediaries, but, as Saffo notes, they will create opportunities for others. Meanwhile, those who too readily bought into the wholesale slaughter of the middleman might want to keep Saffo’s big-picture conclusion in mind for next time: “Beware of conventional wisdom, for it is nearly always wrong.” Anne Stuart is a senior writer at Inc. Technology. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

A Closet Full of Cash

realbusiness.com The Conservative In an industry characterized by sloppy spending and business models with as much staying power as last year’s shoes, Fashionmall has stuck to a classic line Company: Fashionmall.com Inc., in New York City What it does: Operates a virtual mall for shoppers with a yen for designer clothing Number of employees: 45 Conventional wisdom: Retail sites can’t build a brand without blowing their cash, nor can they generate enough money to scale up into the big leagues. Unconventional wisdom: There’s money in the minor leagues. Building a brand is a long-term game, and the company has enough cash to keep going for years. Revenue growth: $14,000 in 1995 to $5 million (projected) for 2000 Profit profile: Lost approximately $6 million last year Capital: Less than $100,000 in seed capital; $35 million from a May 1999 IPO If you really want to get Ben Narasin pissed off, ask him why he isn’t spending the $35 million that’s left over from his company’s May 1999 IPO. Tell him that analyst Catherine M. Skelly of investment firm Gruntal & Co. says his company, Fashionmall.com, needs a “catalyst” to scale beyond last year’s projection of $5 million in revenues. Cite other experts who argue that the company’s only path to glory lies in spending big in order to build a brand, increase traffic, and jack up both the top and bottom lines in a hurry. That kind of talk makes Narasin mad. “With all due respect to intelligent analysts, that’s what they said about everybody — and they are all out of business. Look at MotherNature.com. Gone. Pets.com. They scaled, and look at them. They’re all gone! The concept that you have to spend the money is just plain stupid,” says the 35-year-old CEO, pausing for emphasis. “You have to spend the money intelligently.” Intelligently, for Narasin, means for the long term. For the past six years he’s been carefully building branded sites that will steer Web shoppers to the stores and products they seek. Fashionmall consists of a handful of sites, each of which serves as a central site through which visitors can shop for goods. Web surfers who want to shop for Armani ties or Bulova watches can avoid the various search engines by glancing through the main page of Fashionmall or of one of its other portals, Outletmall.com (a discount site) or the trendsetter Boo.com. The bulk of Fashionmall’s revenues derive from the 60 or so tenants that pay the company 70¢ to 98¢ (depending on the length of their lease) for every shopper who clicks through a Fashionmall site to a tenant site. A small number of tenants also pay Fashionmall for every sale. In addition, the company charges advertisers for banner ads and sponsorship spots throughout the sites, garnering slightly less than 40% of its revenues from those sources. For the millions of people still cowed by the Web, Fashionmall sites offer a one-stop-shopping resource. For its retailer tenants, Fashionmall generates traffic. The company carries no inventory; its resources consist of its intellectual property, its computer equipment, the 45 employees who work in roughly 5,300 square feet of Madison Avenue office space, and, of course, more than $35 million in cash. Narasin launched the company in late 1994 with less than $100,000 in funds from Boston Prepatory Co., an Inc. 500 clothing company he founded and which generated enough cash flow to launch Fashionmall. Narasin, the son of a 30-year IBM man, discovered the Internet in 1994 and was instantly hooked on its promise for spreading the fashion word. He took a leave of absence from Boston Prepatory to run Fashionmall full-time, spending most of his energy evangelizing in an industry resistant to both technology and change. Today Fashionmall has an elite board of directors made up of executives with expertise in retailing, fashion, and mall operations, including former Liz Claiborne Inc. chairman Jerome Chazen, former Neiman Marcus CEO Richard Marcus, and mall developer Robert Taubman, CEO of Taubman Centers Inc. And the company has built a base of about a million unique visitors a month — not enough to rank among Media Metrix’s top 50 Web sites but sufficient to keep its gross margins for last year at more than 80%. Despite having a high-caliber board and a heavily trafficked mall, the company was projecting a 2000 loss of more than $6 million on revenues of roughly $5 million — hardly pretty by conventional accounting standards. Yet Narasin says that the loss, about the same as the previous year’s, is a result of trying to build the company’s brand at a sustainable pace. With its multimillion-dollar stash and its low burn rate, the company could survive for years without any revenue growth. Moreover, Narasin appears to know how to operate the company in the black. For its first four years of operation the company funded its own growth, and for the two years prior to its public offering it turned a small profit. Analyst Heather Dougherty of Jupiter Research respects the company’s prudent financial course and says that Fashionmall has succeeded as a “niche aggregator” that delivers traffic to its tenants without spending itself out of existence. The key to Fashionmall’s long-term success rests in its ability to stick to the plan of building the brand without burning the cash. As a brand builder — and in many other respects — Fashionmall has trod a different path from the one taken by the scores of now-dead players in the fashion and retailing space. When most online retailers were building inventory and reinventing the logistics of home delivery, Fashionmall was eschewing such costs, cutting revenue-generating deals with the likes of Brooks Brothers, Gap, and Lands’ End. And when other dot-coms were spending cash on television and magazine advertising, Fashionmall was swapping space on its sites for valuable ads in magazines like Modern Bride and Civilization. The most spectacular failure in the Web-based fashion industry to date has been Boo.com, which spent $135 million attempting to build its brand before folding. Narasin swooped in and purchased the brand for a figure between $500,000 and $1 million — and got a ton of free publicity to boot. Since purchasing the site, Fashionmall has transformed Boo.com from a high-profile, high-burn-rate, inventory-burdened retailer into a lean portal. At its core, Fashionmall will rise or fall on the notion that established retailers will continue using the Web as a natural extension of their existing businesses. Board member Marcus believes that as more traditional brands use the Web, they will rely on portals like Fashionmall to help shoppers find them in cyberspace. Still, the major challenges for Fashionmall will be holding on to retailers — and to shoppers (who may increasingly skip portals by going directly to their preferred sites) — and finding a way to crack the growth challenge. Skelly, who rates the company as a “market performer” in the intermediate term and a “market outperformer” in the long term, says its key strengths are its available cash balance, slow burn rate, and prudent strategy. “Ben was very forward-looking in predicting that all those dot-coms would go out of business — and he was committed to hanging on to his capital for dear life,” says Skelly, who then falls back on conventional wisdom by adding, “But he sacrificed a great company.” In other words, Narasin could have built a far bigger, fashionably unprofitable Wall Street darling if he had grown the company beyond its modest model. Narasin insists, however, that growth at any cost has already caused the demise of far too many companies. He believes the key to Fashionmall’s long-term success rests in its ability to stick to the plan of wisely investing in personnel and technology, expanding partnerships with blue-chip fashion players, keeping margins fat, and building the brand without burning the cash. “People think there is no barrier to entry on the Web,” he says. “They are wrong. It is just like the fashion business. There is no barrier to getting in, but there is a huge barrier to lasting.” Tom Ehrenfeld is a freelance writer in Cambridge, Mass. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

The Theory Economy

realbusiness.com Commentary: The Markets How could a company like Fashionmall.com sit on more than $35 million in cash and be valued at only $11 million? Here’s how In late December 2000, the value players started to show up at the Internet table. In the last week of the year, Fashionmall.com received not one but two takeover bids as its stock wallowed below $2 a share. The sudden surge in potential takeover activity drove Fashionmall’s stock up to more than $4 a share before it settled at about $3 in January. But the stock-price fluctuation wasn’t the big news about the company. The salient fact was that people were beginning to realize that Fashionmall, like many other Internet companies, was a legitimate bargain. As with other such well-known players as Stamps.com and eToys, the company was trading at a substantial discount to its balance-sheet cash. Until the recent activity, Ben Narasin, Fashionmall’s CEO, might have justly asked of Wall Street, “What’s the big idea?” As of mid-December 2000, Fashionmall had more than $35 million in cash and marketable securities on hand, yet it sported a market value of roughly $11 million, based on its price of $1.50 a share. That share price seemed to defy the company’s potential to operate as a profitable portal delivering traffic to its customers. “Our business didn’t change at all the day we went public, but our stock did,” says Narasin. “There were no significant changes in anything we said we would do and what we have done. It’s absolutely fascinating to me that you can tell the market that you are going to do x, and then when you do x, the market doesn’t care.” Narasin said he would build the customer base of retailers and advertisers without threatening the long-term health of the company. And according to Catherine M. Skelly, an analyst at investment firm Gruntal & Co., Narasin has done just that. “The company is living up to the expectations Narasin laid out when he was going public,” she says. “He said he would drive traffic cost-effectively to the site, and he has.” How could such a company be so undervalued? How could conventional wisdom seem so unwise? The prevailing logic behind much of the Internet economy has been a set of nifty syllogisms in which everything that was once solid wisdom was replaced with an alternate universe of business value. Amazon.com’s cyberpresence gave it the potential for nearly infinite inventory turnover, a prospect that dazzled analysts and gave the company the financial assets to go out and open a real-world set of distribution centers. At the same time, qualities that once counted for something shifted to the negative side of the ledger. While dot-coms enjoyed a huge run-up in the stock market, old-fashioned companies with real products and real assets had to sit on their hands and watch the stock market pass them by. Part of that shift could be attributed to a new role in the market for idea-based companies selling the promise of profits in the new world. Consider such high-profile players as Priceline.com or any of the E-tailers that claimed they would reinvent the world of shopping. Time was when conceptual companies had to show sustained profits before seeking the financial validation of public markets. Losses were considered a definite drawback. The 2000 markets, however, proved the opposite. The speculative shakeout that usually took place before companies went public was now happening in the public markets, says Amar V. BhidÉ, a professor of business management at Columbia Business School. BhidÉ believes that the pack mentality among investors — as demonstrated by a clustering of public offerings by profitless companies — was spawned by a market that increasingly valued companies on intangibles rather than on profit. He cites the Netscape IPO, in August 1995, as a watershed event on Wall Street. At that time, the nascent software maker, which had just booked all of $12 million in revenues for its last quarter, went public at $28 a share and saw that price peak at $75 on the first day before closing at about $58, for a market cap of $2.2 billion. BhidÉ notes that in valuing a business that has an online presence, many investors have based their assumptions on the theory that underlies a company’s model rather than on the profits it churns out. “I don’t know how a market could value companies under these circumstances,” he says. Dot-coms are still being valued on the perception of what their business models can produce. The only difference now is that conventional wisdom has swung around 180 degrees to completely devalue the promise of what these businesses might deliver. So a company like Fashionmall, which, based on its early history, has the ability to operate profitably, is now being valued at less than the sum of its parts. That’s because when companies go public based on the power of ideas — rather than on profits and cash flow and other such quaint figures — the market for their business becomes that much more volatile. Business ideas are and will always be far more subject to the rules of fad and fashion than plain old-fashioned income statements are. In an ironic twist, the way the market values Internet companies runs contrary to the promise of the Web itself. In an ironic twist, the way the market values Internet companies runs contrary to the promise of the Web itself. The Internet promised to customize information for individual users, but Wall Street analysts are hardly analyzing Internet companies individually. Rather, most are assuming that one Internet company is the same as the next. James Whitehurst, a vice-president at the Boston Consulting Group, recently completed a study on how to value Internet companies. He concludes, among other points, that for now the whole process remains a conundrum. “It will be 25 years before we really understand whether the value one puts on a bookmark on Internet Explorer should be more than what one puts on the corner hardware store,” says Whitehurst. “A year ago the market said that the bookmark was worth a ton, and today it says that the same company is worth almost nothing. And that pendulum will continue to swing.” Inevitably, when the theory market ricochets so wildly, companies like Fashionmall will get hammered along with every other company that has a similar business model. When every other online retailer and portal sinks with the weight of perceived carnage, then so too must Fashionmall sink. Pegasus Research, an independent New York City­based research firm, has come up with a list of 20 companies that, at press time, were trading at a significant discount to their cash on hand. Among them were dot-com players such as Mortgage.com, Quepasa.com, NetRadio.com, and Ventro Corp. No matter. In order for Fashionmall to earn a stock price higher than its cash per share, it would have to cater to the prevailing theory on the street — which is that both size and profits matter. Says analyst Skelly, “Scaling up is the only thing that would get investors excited.” (That is, it’s the only thing that Fashionmall could do on its own; the December takeover bids spurred a temporary increase in its stock price.) But guess what? The only way to realize a big bump in visitor traffic would be to squander the cash that’s keeping the company going. And so Fashionmall finds itself in stock-market cloud-cuckoo-land. Prior to the takeover attempts, Narasin announced a stock-buyback program of up to 1 million of the 7.5 million outstanding shares. Not surprisingly, he saw a bargain in the cheap price. Now, with 46% of the common stock in hand, Narasin has the power to reject virtually any offer, though as CEO he has a fiduciary responsibility to consider an offer that puts a premium on the company. He hasn’t seen such a bid yet. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

An Ad Model That Works

realbusiness.com The Underwriter Banner ads were going to fund the entire Internet. Then they unceremoniously fell from favor, and for good reason. But not all advertising models are created equal Company: Healthcommunities.com, in Northampton, Mass. What it does: Hosts content-rich Web sites for physicians, sponsored by pharmaceutical and medical-device companies Number of employees: 60 Conventional wisdom: As deep-pocketed E-health sites like DrKoop.com gasp for air, small, privately held health sites are likely to drop dead in their tracks. Unconventional wisdom: An imaginative, sound advertising model has made the company consistently profitable. Revenue growth: From $2 million in 1999 to $5 million in 2000; $7 million projected for 2001 Profit profile: Profitable since day one Capital: $60,000 in personal funds Last year’s dot-com epidemic left one group of online businesses feeling particularly queasy: the E-health companies. Despite having former surgeon general C. Everett Koop at its helm, DrKoop.com saw its stock price, which had peaked at $45 in July 1999, trading below $1 earlier this year, putting the company in danger of being booted off the Nasdaq. Like many other content-based E-health sites, DrKoop.com relied on banner ads, a model that proved to be not only unworkable but unprofitable. So how is it that one health-information company has succeeded online by relying on corporate sponsorships to make money? Dr. Stanley J. Swierzewski III, CEO of Healthcommunities.com, simply prescribed himself a new model. In 1996, Swierzewski, a practicing urologist, paid a Web-development shop to create a site that would promote his practice. He reasoned that other urologists would benefit from a similar service. Swierzewski was keen on the idea of offering the service to doctors free of charge, but he had his doubts about whether banner ads could support such a business. So he drew up a business plan in which pharmaceutical and medical-device companies would sponsor Web sites for physicians. The sponsoring companies could then use the sites to market themselves and their products to doctors within the Healthcommunities network. How does Swierzewski’s idea differ from the direct-to-consumer banner-ad model? For one thing, it employs a different format. There are no banner ads on a Healthcommunities site; the corporate sponsors are mentioned only at the bottom of each page. But that exposure is precious for many businesses that covet face time with physicians. According to Pharmaceutical Research and Manufacturers of America (PhRMA), in 1999 a whopping $14 billion went into marketing drugs, and the majority of that money went to direct-to-physician campaigns, says Jeff Trewhitt, a PhRMA spokesperson. In addition to dropping off logo-splashed mugs and free product samples, pharmaceutical reps spend time explaining the therapeutic properties of various drugs to doctors, Trewhitt says. The thinking goes that if the doctors know about the drugs and have a chance to give their patients free samples, they are more likely to prescribe the medications. So far, Swierzewski’s model seems to be working. He says that last year Healthcommunities generated $5 million in revenues, all of which came from medical-product sponsor companies. Because the underwriters pay for all the sites before Healthcommunities even builds them, the company doesn’t have to worry about attracting users and then selling those eyeballs to advertisers. “Our motto is ‘We generate the income before we generate the expense,” says Swierzewski, referring to his company’s unusual status as having been profitable on the Web since day one. That sets Healthcommunities apart from E-health giants like WebMD Corp., which posted a 1999 loss of $288 million on revenues of $102 million. One customer that likes Healthcommunities’ model is Boston Scientific, a $2.8-billion medical-device company based in Natick, Mass., that markets, among other things, surgical equipment to urologists. By sponsoring Healthcommunities sites for urologists, “we don’t just go in and talk about our products; we can also consult with them on a practice-building basis,” says Beth Bronstein, director of communication in Boston Scientific’s microvasive division. “We can ask them, ‘How are you marketing your practice? How is your communication with your patients?” Another key to Healthcommunities’ success, Swierzewski says, was his decision to pitch his first batch of free sites specifically to urologists. Focusing on that relatively small market — about 8,000 physicians nationally — allowed him and his staff to further develop the company’s business model before branching out into other specialties. It also helped him begin to corner the market one specialty at a time. “We got the majority of urologists signed on within three months,” Swierzewski says. He is now taking the company’s concept to pulmonologists and will continue to add to the company’s canon, specialty by specialty. Swierzewski had doubts about whether banner ads could support his business. So he drew up a business plan that would. Unlike sites that post information straight from drug and device manufacturers, Healthcommunities gets its content from physicians, who contract with the company. The client doctors then work with Healthcommunities staff members to customize their own personal Web pages, offering such things as physicians’ biographies, office hours, and information about the procedures they use to treat their patients. Some sites provide medical forms that patients can fill out at home instead of in the waiting room. Site users can’t purchase anything, and they don’t see banners streaming across the page. According to Dr. Roscoe Nelson, a urologist in Scottsdale, Ariz., who signed on with Healthcommunities to produce a site for his practice, the fact that the actual commerce on his site is transparent to the user is significant. “The problem that I see with the Internet in medicine is that a large percentage of the sites are selling things,” says Nelson. He feels that for many patients such product pitches detract from the credibility of the information that’s being offered. Patients who visit his site and view the doctor-generated content before arriving at his office “come in with good questions,” he says. And because his patients learn a lot of basic information on the site, Nelson can spend more time talking with them about specific issues. “I can personalize the time I spend with them in the office,” he says. Although Nelson feels comfortable that his site isn’t acting as an electronic pitchman to needy patients, he does acknowledge the potential ethical conflict involved in being sponsored by a pharmaceutical company. But he doesn’t believe that he’s been unduly influenced by that connection. “They made me a no-strings-attached offer,” he says of his site’s sponsors. “I don’t think there’s been any effect on my prescribing or treating habits based on the time that I’ve spent with sponsors. I prescribe the drugs that are medically indicated.” Swierzewski is betting that both the physicians and the companies that are marketing to them will continue to see the value in his offering. And unlike the founders of some of the big-name health dot-coms, Swierzewski is growing his company organically. He started it with a personal investment of $60,000 and has relied solely on its revenues for growth — much to the chagrin of the capital community. “They told me that I wasn’t spending enough,” he says. Despite his lack of outside funding, Swierzewski expects to grow the company from 60 employees to 100 by the end of this month. All that growth, and Swierzewski still has time to remove kidney stones? Despite his foray onto the Web, the doc says he’s determined to maintain an active urology practice. “There may come a time when I have to choose,” he says. But for now he spends his days logging time both on the computer and in the operating room. Anne Marie Borrego is an assistant editor at The Chronicle of Higher Education. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.