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About 4370 days ago E-Commerce

Browser Beware

Special Report Before you rely on an online ratings service, get to know the source — and how it makes money When you’re shopping online, whom can you trust to give you the best shopping experience? That’s the quandary facing consumers and small-business owners alike who are buying goods from unfamiliar Web stores. And with so many online companies vying for your hard-earned dollars — not to mention the fact that so many of them are in questionable financial condition — it’s natural to want to look to a trusted third party for a recommendation. But before you rely on an online ratings service like BizRate.com or Gomez.com, you’d better read the fine print. Consider the experience of Jehremy Foster, who was in the market for a camcorder this past December. He thought the camera would make a good Christmas present for his wife, who was then six months pregnant. An experienced Web shopper, Foster, 30, browsed consumer comments in an online camera forum until he settled on the model that seemed best for his soon-to-be-growing family: a Canon ZR10. Foster’s next stop: MySimon.com’s comparison-shopping service, where he sorted by price a listing of online merchants that sold the Canon camcorder. Noting that the lowest-priced vendors were listed at the top, Foster scanned down the list until he found vendors that rated at least two out of three possible stars on Gomez.com, an online ratings service. Family Photo and Video — a company that Foster had never heard of — had a Gomez rating of two stars and was selling the camcorder at the then-attractive price of $697. The prices other vendors listed for the same item ranged from $735 to $1,069. Foster says that he then searched for Family Photo and Video on BizRate .com, which rates 2,000 online merchants based on customer-survey information. The photo store rated an 8.3 out of 10, which sounded pretty good to Foster, so he placed the order online and crossed that item off his gift list. But the next day, Foster says, he got a call from a salesperson at Family Photo and Video that he found disturbing. The caller was pushing him to buy accessories and extra batteries for the camcorder he had just ordered. “It was totally bizarre,” says Foster. “Once the salesman realized I wasn’t going to buy anything extra, he was very rude and short with me.” (Family Photo and Video customer-service supervisor Mike Tate responds that sales reps follow up with customers primarily to confirm orders that might be bogus, and to offer promotional discounts. “There’s no pressure to buy,” he says, noting that Family Photo’s salespeople don’t work on commission.) Unsettled, Foster tracked down Family Photo and Video’s off-line address. When he found out that the business was located in New York City, he logged on to the site for the Better Business Bureau of Metropolitan New York. There, to his mounting dismay, he found numerous complaints about Family Photo and Video — although the store was listed under another name, Abe’s of Maine. A general Web search for Abe’s of Maine led Foster to Photo.net, an online community of amateur and professional photographers, where he discovered some 70 complaints from people who said they had been burned by Abe’s of Maine. The complaints alleged everything from getting billed for $400 shipping charges to the old bait-and-switch routine. (A favorite ploy of certain camera merchants is to say a hot camera model is in stock and then ship a different model.) Foster wondered how Family Photo and Video had managed to get such seemingly favorable ratings from both BizRate.com and Gomez.com. Foster’s unfortunate experience notwithstanding, Tate says the ratings accurately reflect his company’s level of service. “We have a toll-free number, and whatever the problem, we will handle it,” says Tate. More than half of Family Photo and Video’s business comes from repeat customers, he adds. And given the site’s typical daily volume of about 200 orders, he maintains that receiving roughly 70 negative remarks on Photo.net during what was actually a five-year period isn’t a bad record at all. Still, Jehremy Foster’s story begs the question: How is it that the online ratings systems don’t reflect the bad experiences of people like Foster and visitors who post messages on Photo.net? The short answer is that ratings services are designed to spotlight good online merchants, not to warn consumers about bad ones. After all, the vast majority of online ratings sites are operated by companies that need to make money in order to keep providing their services. Most of the companies receive some part of their revenues from the merchants they are rating. Such a relationship between the ratings services and the companies they report on presents at least the appearance of compromising the quality of those ratings. San Francisco-based CNET Networks has considered posting consumer feedback regarding online merchants but has so far steered clear. “We don’t have the ability to verify whether a particular poster is truly a buyer from that merchant or whether it’s another merchant looking to slam their competitor,” says Dan Miller, director of CNET’s Shopper.com, a comparison-shopping service. CNET tracks feedback from consumers about resellers but doesn’t publish the individual comments. The feedback is offered to the merchants, and Miller says that most consumer complaints reported to CNET are resolved within two days. To help authenticate the complaints, consumers are asked to submit a customer-order number with a complaint about a vendor. In the future, Miller hopes to add to CNET’s merchant information the number of complaints the site has received about each vendor, as well as how many of those complaints have been satisfactorily resolved. Ratings services are designed to spotlight good online merchants, not to warn consumers about bad ones. If the situation is complicated for ratings purveyors, it’s even more befuddling for the average consumer, who’s likely to simply take the ratings at face value. But the fact is, using ratings sites effectively requires knowledge of the raters’ business model and of the degree to which the company’s economic interest could skew the way the information is presented. Without that knowledge, consumers might find themselves in trouble, especially, it seems, when they’re in the market for camera equipment. In May 2000 a computer-industry worker in Benicia, Calif. (who asked to be known only by her online alias, Cneber), ordered an Olympus C-3030 Zoom camera from Best Stop Digital, an online merchant she had found listed on CNET. Best Stop Digital’s site said that the highly in-demand camera was in stock at the attractive price of $850, while other merchants were listing it about $200 higher. A few days later, when Cneber hadn’t received the camera but found that her credit card had been charged for the purchase, she called Best Stop Digital to ask for a tracking number. She learned that the camera she’d ordered wasn’t in stock and probably wouldn’t ship for several weeks. When she asked the customer-service representative to cancel the order, she was put on hold and then disconnected. Further calls to Best Stop Digital were transferred, put on hold, or disconnected, and Cneber says that eventually no one answered the phone at all. Cneber, whose account is corroborated by documents and correspondence she shared with Inc. Technology, then sent an E-mail message to CNET to alert its product reviewers that a questionable merchant was included in its listings. She also recommended that CNET drop Best Stop Digital from its vendor list. She says that CNET responded with a message that the company made no guarantees regarding the quality of merchants that were listed on its site but not “CNET certified.” CNET’s Miller says he’s sorry about Cneber’s experience and confirms that CNET had received earlier complaints about Best Stop Digital. Miller says he suggested to Cneber that she contact her credit-card company for help with the charge. (Her account was credited for the amount of the purchase a few weeks later.) In this case, Miller says, CNET couldn’t mediate between the company and the consumer, because CNET’s best information indicated that Best Stop Digital had gone out of business and had been dropped from CNET’s ratings. (Best Stop Digital is, in fact, still in business, but the company didn’t respond to Inc. Technology‘s repeated requests for comment.) Miller says that CNET is well aware of cyberspace’s bad apples, who “are hurting the credibility of online retailers everywhere,” he says — not to mention the credibility of online information sites. To be a CNET-certified vendor, a merchant must supply CNET with up-to-date information on its pricing, shipping and handling, and inventory, as well as its site’s customer-service policy. The company must also honor the prices advertised on its Web site, conduct its transactions on a secure server, process orders promptly, deliver merchandise in professional packaging, and respond to all E-mail messages and phone calls from customers within two business days. According to Miller, CNET recently added a “code of conduct” that applies to all its listed vendors, whether they are CNET certified or not. The code prohibits certain bad practices, such as making orders contingent on the purchase of additional materials. CNET is also aware of the complaints about formerly CNET-certified merchant Family Photo and Video/Abe’s of Maine that are posted on Photo.net. “We can’t verify those complaints. We can only act on what we know,” explains Erik Kokkonen, a CNET vice-president. If a consumer complains to CNET about one of its vendors, a CNET staffer will contact the vendor and give it a certain amount of time to fix the situation. If the merchant is repeatedly unresponsive, CNET will kick it off the list for 5 days for the first serious offense and for 15 days for the second serious offense. If there’s a third offense, the merchant’s contract with CNET as a certified vendor is terminated, but the company can still remain on the site as a regular listed vendor. “We are in the business of bringing buyers and sellers together,” says Kokkonen. “But the reality is, we have a responsibility to the sellers to make sure we’re treating them fairly as well.” Where to Turn? Cameras and electronics are product categories that are especially rife with consumer complaints, especially with the prevalence of so-called “gray market” goods (“off-brand” versions of products that manufacturers produce to sell inexpensively abroad without warranties) that make their way into the U.S. market. But consumers need to be aware of the economic imperatives of the ratings services, no matter what kinds of goods they are looking to buy. Performing that level of research can be a big job, since there are so many different kinds of online services that aim to improve the Web shopping experience. (See “The Top Ratings and Comparison-Shopping Sites at a Glance,” below.) BizRate.com is one of the most visible comparison-shopping and vendor-rating sites on the Net. The site’s ratings section ranks 2,000 “partner” merchants on a scale of 1 to 10 based on data from consumer surveys. Using 10 shopping criteria, BizRate.com surveys shoppers, once at the point of sale and then again after goods have been shipped, in order to get feedback on the buyers’ fulfillment experience. BizRate.com calls its partner merchants “Gold Stores,” although that somewhat lofty designation may often be misleading, as it would seem to imply that the stores offer unusually high-quality products or service. According to BizRate.com president and CEO Chuck Davis, the company, located in Marina Del Ray, Calif., aims to include all online merchants in its surveys. It doesn’t charge vendors for a basic listing. However, vendors can pay for “preferred” placement in the marketplace section, which means that the merchant’s listing will appear at the top of any consumer search of that section. BizRate.com provides a daily feedback service to Gold Store merchants and sells additional detailed reports for about $3,000 a month. BizRate.com also makes money if buyers click through to the seller’s site to make a purchase. “We do no rating ourselves,” says Davis. “All we do is set up the infrastructure for unbiased buyer ratings.” BizRate.com’s ratings may seem free of commercial taint, since companies can’t pay to influence the surveys, but there is still room for murkiness. For instance, a merchant’s rating is based half on its front-end store and half on its back-end fulfillment, so stores with questionable practices can still receive a rating of 5.0 and above if they merely have a nice storefront. “It can be difficult to tell exactly what the numbers mean,” says Preston Gralla, author of The Complete Idiot’s Guide to Online Shopping. “What’s an 8.4 versus a 9.5? Those numbers might be based on criteria that aren’t important to you.” Gralla advises that shoppers take advantage of a BizRate.com feature that allows consumers to rank merchants according to specific criteria, such as on-time delivery. “If a merchant has 91% on-time delivery, that means something,” says Gralla. On Gomez.com, another online ratings site, it’s especially difficult for consumers to assess whether a merchant’s score reflects variables that are important to them, and for a very good reason: Gomez.com doesn’t disclose all of the details about the criteria it uses to judge sites. “That would be like Coke giving away its special formula,” says Julio Gomez, chairman and CEO of Gomez Inc., in Waltham, Mass. “For each of the 75 industries that we cover, we have about a dozen criteria that we use to judge each site.” Gomez engages 30 industry analysts to generate the ratings rather than relying on consumers. (Gomez.com does publish basic information about its overall methodology, however.) In addition to running its own ratings site, Gomez.com provides merchant-ratings information to online comparison-shopping and consumer-information sites like MySimon.com, DealTime.com, and CNET.com. What online shoppers who come across a Gomez.com rating may not realize is that the Gomez score doesn’t take into account any aspect of the fulfillment experience. According to Julio Gomez, sites are scored only on the quality of the online experience they present to shoppers and on whether they have certain policies, such as accepting returned merchandise. So under Gomez.com’s system, it’s possible for a merchant with a slick online presence but questionable or even shabby business practices to receive a rating of two or even three stars out of three possible stars, as Jehremy Foster discovered when he encountered Family Photo and Video’s two-star Gomez rating. CEO Gomez answers such criticism by saying that his company concentrates on rating the consumer’s online experience, period. “We’re very focused on what we do. We are just about the customer experience on the Internet,” he says. His company doesn’t rate a merchant’s fulfillment performance, he says, because it wouldn’t be possible for his analysts to order products from all the 6,500 online merchants that are Gomez.com certified. “If someone out there would like to do that, they’re welcome to it,” he says. As it happens, Julio Gomez’s former employer, Forrester Research Inc., a Cambridge, Mass., market-research firm, appears to be doing just that. Forrester offers a free online consumer service called PowerRankings, which combines extensive consumer-survey data with expert analysis to rank the top E-commerce sites on the Web. According to Tom Rhinelander, research director at Forrester, no company can pay to get on (or off) the PowerRankings list. Here’s how the ranking system works: Forrester commissions a survey provider and research house (currently the NPD Group) to poll 20,000 customers of online E-tail and travel sites. From that data, Forrester analysts identify E-commerce sites that contain enough consumer data to justify inclusion in the PowerRankings. Since its resources are limited, Forrester ranks no more than 10 companies in each of the 13 industries that its rankings cover, which means that shoppers are unlikely to find unfamiliar merchants on the list. Forrester’s analysts open accounts with, and shop at, the sites in question, placing real orders for products; they then return all the merchandise. Based on those responses, Forrester prepares the rankings, giving the consumer-opinion data two-thirds weight and the in-house expert opinion one-third. “We believe the consumer data should carry more weight than expert opinion. That’s part of our methodology,” Rhinelander says. The PowerRankings list isn’t wholly free of the whiff of commercialism, since some of the companies on the list are Forrester’s clients. But Rhinelander says the company’s clients aren’t able to influence the ratings, even if they want to. Clients sometimes “call up and moan about the rankings,” he says. “The only way that will get any traction is if we get something wrong, and that can happen.” For consumers who are looking for a beacon of brand-name credibility on the Internet, there’s always the Reliability Seal of the Better Business Bureau OnLine (BBBOnLine). BBBOnLine is drawing on the bureau’s nearly 90 years of off-line credibility, making it a name to believe in, if not blindly trust. Consumers can search BBBOnLine to see if a particular merchant has received the organization’s certification. In order to achieve the Reliability Seal, online businesses must have been in business for at least a year and be members of their local bureau. The difference between BBBOnLine and other ratings services is that the companies that get the Reliability Seal must have already met certain qualifications. With straight sponsorship sites, virtually any company can pay to be listed. BBBOnLine has credibility because local bureau chapters are well situated to vouch for the legitimacy of businesses in their areas, according to Steve Salter, director of operations and administration for BBBOnLine, in Arlington, Va. Usually, local bureaus make an in-person visit to the companies that apply for membership, he says, which weeds out many of the worst types of operations. Checking with the Better Business Bureau sooner might have saved Jehremy Foster some headaches, although in the end he did receive the camera that he had ordered from Family Photo and Video (a.k.a. Abe’s of Maine). But Foster says his faith has been shaken. “I don’t trust any of the online ratings systems anymore,” he adds. “From now on, I’m going to either have a personal recommendation or stick with a known entity.” Lauren Gibbons Paul is a freelance writer based in Waban, Mass. The Top Ratings and Comparison-Shopping Sites at a Glance BBBOnLine What it is A service for certifying online merchants’ reliability and security and for finding out about consumer complaints lodged against merchants. How it works Consumers can search the site for companies that have received the BBBOnLine Reliability and Privacy Seals. Consumers can also file a complaint against a vendor online. How it makes money Like regional BBBs, BBBOnline charges companies membership dues that range from $100 to $10,000 annually (depending on the member company’s size). What you may not know BBBOnline doesn’t yet offer complete merchant data from all its 130 member organizations, so link to the bureau’s regional sites to investigate companies. BizRate.com What it is An online comparison-shopping and merchant-ratings service based on consumer-survey information. How it works Consumers can search for particular products in a variety of categories and see the rankings of merchants that sell the products online. In the Store Rating section, users can search for a particular store name and read detailed profiles. How it makes money Merchants pay BizRate.com to advertise their promotions. BizRate.com collects referral fees from merchants that get business off its site. BizRate.com also sells companies detailed market research culled from user surveys. What you may not know Although BizRate.com sites are ranked on a scale of 1 to 10, consumers are unlikely to find any site with a rating lower than 5. The designation “Gold Store” on BizRate.com means only that the merchant has agreed to put BizRate.com’s surveys on its site. CNET What it is An online news, reviews, and comparison-shopping portal. How it works Consumers can search CNET for product reviews and price comparisons. Consumers can also view comments from other shoppers in unmonitored message boards regarding a particular product or vendor. How it makes money CNET sells banner ads and also receives a referral fee from vendors when users go to their sites. All merchants in CNET Networks’ price listings pay to be listed. Some merchants pay a premium for order of placement or prominence on the list. What you may not know CNET makes no guarantees regarding the quality of merchants that are listed on the site but aren’t “CNET certified,” although it will investigate complaints about any listed vendor. Gomez.com What it is An online merchant-ratings service based on expert analysis. How it works Users can view ratings of the top vendors for the quality of the online shopping experience in a number of categories. How it makes money Gomez.com receives fees when consumers purchase products from certified vendors. It also sells consulting and in-depth reports to vendors. What you may not know Gomez’s ratings don’t take into account the consumer’s experience after an order has been placed. So the ratings don’t reflect either order fulfillment or customer service. MySimon.com What it is A comparison-shopping service. How it works MySimon.com allows consumers to compare prices on items offered by online vendors. It also lists Gomez.com’s ratings information for some vendors. How it makes money MySimon.com sells advertising to vendors. What you may not know MySimon.com aims to list as many merchants as possible that offer a particular product, but it lets vendors pay for preferential placement on its lists. PowerRankings of Forrester Research Inc. What it is An online merchant-ratings system based on consumer-survey data and expert analysis. How it works Visitors can view rankings of 10 merchants in 13 categories that include apparel, toys, banks, and electronics. How it makes money Forrester makes no revenues associated with its PowerRankings list. The company makes money through its primary business — market research and consulting. What you may not know The PowerRankings list rates no more than 10 companies in any single category. Please e-mail your comments to editors@inc.com.

About 4582 days ago E-Commerce

Sweet Deals

E-Strategies Mrs. Beasley’s delicious business has grown richer, thanks to a new ingredient: a shrewd E-commerce strategy Charles Bronson knew exactly what to give his friends for Christmas one year: picnic baskets filled with cookies, cakes, and breads. And the veteran tough-guy actor knew exactly where to get them: Mrs. Beasley’s, the Los Angeles bakery whose impeccably presented pastries are widely considered just the ticket for Hollywood wrap parties, opening nights, and Oscar galas. At the time, Mrs. Beasley’s didn’t actually carry picnic baskets. But what Bronson wants, Bronson gets. So the company found some suitable straw hampers, filled them with goodies, and sent them off to everybody on Bronson’s gift list. Celebrity customer delighted. Case closed. Almost. The incident got company CEO Ken Harris to thinking. If Charlie Bronson would buy picnic baskets, others might, too. So Harris looked around for high-quality, low-cost picnic baskets. He found them in China for $12 apiece. He bought thousands, stocked them with baked goods, priced them at $100 to $150 each, and watched as they sold briskly in the company’s eight retail stores and on its Web site. “I’ve got Charlie to thank for that,” says Harris. That’s just one example of how the CEO thinks up new ways to sell an old tradition in the form of Mrs. Beasley’s handmade, attractively packaged baked goods. But he and his team go beyond simply satisfying the stars. They’ve created a stellar blueprint for integrating “bricks” and “clicks” businesses through dozens of strategic partnerships, superior logistics, and some surprisingly simple marketing techniques. Over the past 20 years, Mrs. Beasley’s has whipped up a loyal following as rich as the company’s brownie bars. Started as a home business by two sisters in Tarzana, Calif., Mrs. Beasley’s grew from a neighborhood bakeshop into a chain of stores where ordinary folk and such Los Angeles luminaries as Jodie Foster, Cher, and Earvin “Magic” Johnson spend $30 to $200 on gift baskets packed with gourmet goodies. But even as Mrs. Beasley’s expanded into upscale communities like Beverly Hills, its own fortunes remained decidedly modest. In 1990 the original owners sold the unprofitable company to a Los Angeles investment-management company. “When we bought Mrs. Beasley’s, it was a $2.5-million company,” Harris recalls, noting that it had taken the owners 10 years to reach that figure. “We thought we could make it a real business.” Today things are a lot sweeter for Mrs. Beasley’s, which turned profitable in 1997 and reached nearly $11 million in sales in 1999. Harris expects the company to hit $17 million this year (but he’s got his bakers making enough muffins and lemon cakes for $18 million — just in case). The CEO credits much of the company’s growth to its aggressive, and highly successful, expansion into E-commerce. Mrs. Beasley’s Web site, launched just before the 1999 holiday shopping season, hit $2.1 million in sales in its first 60 days — almost 20% of the pastry peddler’s total sales for the year. Harris attributes those tasty results largely to Mrs. Beasley’s vigorous marketing strategy, which relies heavily on innovative affiliations — including promotions on corporate intranets and lucrative revenue-sharing partnerships with brand-name Web sites. Now Mrs. Beasley’s online business is profitable enough that Harris finds himself beginning to wish he could unload the brick-and-mortar bakeshops where the business began. “When we bought Mrs. Beasley’s, it was a $2.5-million company,” CEO Ken Harris recalls, noting that it had taken the original owners 10 years to reach that figure. The company processes all its own orders, rather than adding a third-party fulfillment company to the mix. Its Web site can handle $7 million a month in sales. It also keeps a private online address book for each customer that includes a gift-giving history. (Harris’s own address book includes entries like “Crystal, Billy” and “Ryan, Meg.”) Harris, 57, whose deep, southern California tan contrasts with his tough, native New York accent, is a numbers guy, easily citing gross margin (70%) or the average cost of acquiring a new customer ($28). He readily admits that Mrs. Beasley’s recipe for success hasn’t come without lumps: wasted expenditures, sour deals. Even so, Mrs. Beasley’s offers valuable lessons for any company that’s looking to do business in multiple channels — even those who can’t count Oscar winners among their clientele. Going into the 2000 holiday season, Harris has two wishes. First, he wants to make Mrs. Beasley’s “the leading online retailer for shared gift products.” The operative word: shared. Mrs. Beasley’s banks on the idea that customers — primarily businesspeople — send gifts to their own customers who then share the bounty. “You order a gift basket, it goes around the conference table during a meeting, people try the cookies, and they’re hooked,” says Harris. His other goal: Making Mrs. Beasley’s a year-round habit. Currently, the company does 65% of its business in October, November, and December. (In fact, Mrs. Beasley’s employees tend to talk about the Christmas season the way other people talk about natural disasters: the Blizzard of ’78, the Quake of ’89.) Obviously, Harris would like to build off-season sales for other holidays: Valentine’s Day, Mother’s Day, even the Fourth of July. But he’s far more interested in training corporate buyers — who at holiday time spend an average of $350 per order, more than four times as much as other customers — to think of Mrs. Beasley’s whenever they need to send a positive message. Want to welcome a new account? Send a Beasley’s basket. Want to acknowledge a big order? Send a Beasley’s fudge cake. According to the company’s research, business gift giving is a $20-billion market, growing 12% annually. And as companies increasingly turn to the Web for shopping, Forrester Research says, the online gift market could grow to $17 billion by 2004 (compared with $1.2 billion in 1998). “We’re amazed at how big that pie is,” Harris says, with a straight face. There is no Mrs. Beasley; like Betty Crocker, she’s a fictional figurehead. But if there were a Mrs. Beasley, she’d be amazed at where her company seems headed, considering its humble — by Hollywood standards — beginnings. The business started as a hobby. For years Nancy Fox and her sister, Lisa Blons, both of Encino, Calif., baked cakes, cookies, and muffins from recipes they had learned from both of their grandmothers. In 1980 the sisters went into business, hoping to make a living from their lifelong passion for baking. They called it Mrs. Beasley’s because they felt the name embodied the perfect, homey, old-fashioned image. And they insisted on using only the highest-quality ingredients, such as Ghirardelli chocolate and Skippy peanut butter. And while banking on those traditional flavors, they also created some slightly exotic products: raspberry bars, pistachio muffins, zucchini bread. At first they worked from Fox’s home, but eventually they opened a tiny shop on Ventura Boulevard in Tarzana. Demand, fueled entirely by word of mouth, was high from the start. “Our very first Christmas was phenomenal,” recalls Fox, a high-energy blonde, now a cookbook author and a consultant to Mrs. Beasley’s. “We had to stop taking orders because every muffin that came out of the oven was already promised. We not only took the phone off the hook — we had to lock the doors of the retail store.” But as Mrs. Beasley’s approached its 10th anniversary, its founders realized it had grown too big to be run as a home-style business. And they found it harder and harder to balance the December demand with the negative cash flow of the other 11 months. Ultimately, they sold the business to Kayne Anderson Investment Management Inc., of Los Angeles. The firm, which has $6 billion under management, hired Harris to run Mrs. Beasley’s. At the time, taking over the tiny company seemed like an abrupt change of course for Harris. A veteran food executive, he had previously run the W.R. Grace restaurant group, which includes the Charlie Brown, El Torito, and Reubens chains, and was chief operating officer of the House of Blues chain. But then, Harris is a study in contrasts. He drives a Jaguar XK8 convertible with a vanity plate (K HARIS), but pumps his own gas. He dines at Wolfgang Puck’s see-and-be-seen restaurant, Spago, where the hostess greets him by name, but prowls corporate auctions to pick up used office furniture. In fact, frugality is an integral part of his strategy. “We treat this business as if we’re spending our own money,” he says. (Actually, he is spending his own money. Harris and two other executives are part owners in Mrs. Beasley’s; Harris declines to reveal percentages.) So he holds overhead to 5% while monitoring the competition. But ingredients are the one thing that Mrs. Beasley’s doesn’t pinch pennies on. Bakers remain faithful to Nancy Fox’s original recipes, using not only her favorite brand-name products but also her labor-intensive methods. Workers hand-squeeze the lemons, for instance, for the company’s Miss Grace Lemon Cakes. (Mrs. Beasley’s acquired its rival, Miss Grace Lemon Cake Co., in 1995.) They hand-place M&Ms on cookies and press them in, hand-roll chocolate chunks in powdered sugar, and hand-pour glaze over brownie bars. “That’s the reason these cost what they cost,” Harris says, pointing to a small basket of treats that sells for $30 plus shipping. As late as mid-1999, Harris was an Internet novice. “My only experience was ordering dog food — and books from Amazon,” he admits. But he quickly realized that Mrs. Beasley’s and E-commerce went together like, well, like sugar and butter. The Web offered an obvious new way to reach consumers. Mrs. Beasley’s was already selling to companies that routinely sent gifts to 20 or 200 or even 2,000 recipients. Harris wanted to build a Web site that would make life easier for the corporate buyer ordering all those baskets. First, Harris struck a deal with Guidance, of Marina del Rey, Calif., which had built the Web sites Footlocker.com and Rightstart.com, among others. Guidance took 12.5% equity in Mrs. Beasley’s for what Guidance CEO Robert Landes unabashedly calls “a world-class Web site.” In exchange for its equity stake, Guidance cut its normal $150-an-hour rate down to $60, says Landes, who, at six feet eight, looks like the Holy Cross basketball player he once was. At full price, Landes estimates, the site would have cost $1.5 million; on account of the equity deal, the price tag for the 90-day job came to $900,000. Harris expects to spend $500,000 to $750,000 annually to maintain and expand the site. Compared with many E-commerce sites, Mrs. Beasley’s is actually quite simple. The site uses just 200 SKUs, or product numbers; there’s no animation; it doesn’t upsell, Ã la Amazon (“Customers who bought the lemon cake also bought these products”), because Harris finds that tactic annoying. But the site is a powerful tool for overburdened buyers. They can include up to 500 recipients in a single order. They can send the same item to many different recipients: a $30 gift basket to 300 customers, for instance. Or they can send different items to different recipients: a $50 gift basket here, a $100 version there. Thanks to the personal address book, they can easily send the same gifts to the same recipients year after year (or avoid doing so). They can establish a corporate account and track orders. And they can start a big order (orders for $2,000 to $5,000 are routine during the holidays), save it online, and finish the transaction later. But there was more to getting Mrs. Beasley’s online than designing the ideal interface. As Harris puts it, “You can’t be at Internet speed when the order’s on its way in and at a snail’s pace on the way out.” And even with the Internet, customers — especially high-spending corporate customers — expect to get somebody on the telephone instantly when they’re having problems. So Harris invested an additional $100,000 in a faster, more powerful order-processing system. He moved customer service in-house, building a 175-station call center at the factory. And he invested $50,000 in software that tracks call volume, hold time, and the number of people who hang up before being served. Then Harris whipped up deals with many well-known Web businesses. Visitors to 1-800-Flowers.com can buy Mrs. Beasley’s products; the floral site gets an undisclosed cut of revenues. A similar arrangement gives Staples a share of the sales that Mrs. Beasley’s makes through Staples.com. Web sites for auto clubs, alumni and trade associations, and other groups steer members to Mrs. Beasley’s. There, the members receive a 15% discount. AOL, Barnes & Noble, and other companies offer Mrs. Beasley’s products to their employees at a 15% discount through corporate intranets (with intranet-management businesses like Abilizer.com taking a 5% share of each sale). Such arrangements account for 22% of the company’s overall sales, almost double the 13% handled directly through its own Web site. (Remaining revenues come from catalog, retail, and wholesale business.) Mrs. Beasley’s stays in touch not just with the people who have bought its gift baskets but also with those who have received them. Thanks largely to those follow-up efforts, such as E-mail marketing campaigns that cost less than $4 per 1,000 messages sent, about 8% of gift recipients later become customers. All the company’s E-commerce strategies paid off in the 1999 holiday season, when the company’s sales reached $7 million, up 25% over 1998 revenues. Thirteen percent of the people who visited Mrsbeasleys.com spent money there. (At many sites, only 2% of visitors actually make a purchase, according to Forrester Research.) And although many online shoppers complained that other gift sites sent the wrong items or missed delivery dates last holiday season, Mrs. Beasley’s claims that it delivered 99.8% of its orders correctly and on time. Despite its astonishing first season online, Mrs. Beasley’s stumbled a few times. Last year the company spent $30,000 for banner ads on the Blue Mountain Arts greeting-card site. “I think we made $923,” Harris says wryly, referring to total sales from that campaign. Lesson learned: Don’t pay for placement. These days Mrs. Beasley’s sticks mostly to revenue-sharing agreements. And then there are the brick-and-mortar shops. “I built four retail stores in ’97 and ’98. Knowing what I know now, I wouldn’t have spent the capital,” Harris says. That’s because the return the company will get from those stores is nowhere near what it will get from the Internet. (Retail-store sales rose 15% this year, while Internet sales rose more than 1,000%.) Meanwhile, out at Mrs. Beasley’s 55,000-square-foot factory and warehouse in Carson, things are gearing up for a holiday season that could make last year’s look like a dress rehearsal. An off-season staff of about 50 will swell to 350, working three shifts to bake, pack, and ship an almost unimaginable number of muffins, cookies, and brownies. During the slow summer months the company might make 100 lemon cakes daily. In November they increase output dramatically, “kicking out 3,000 cakes a day,” says bakery director Jeff Beasley, who will hold the factory team to a rigid production schedule. “We plan the living hell out of it,” Harris says. “In the month of December, it all pays off.” Anne Stuart is a senior writer at Inc. Technology. Mrs. B’s Secret Recipe For a company with less than $20 million in revenues, Mrs. Beasley’s has paired up with some pretty major partners. Here’s a sampling of Mrs. B’s deals: Revenue sharing with 1-800-Flowers.com. The online florist promotes Mrs. Beasley’s products in exchange for an undisclosed percentage of sales made through its site. Average monthly sales January through September: $81,000; average monthly holiday sales: $250,000. Revenue sharing with Staples.com. In exchange for an undisclosed percentage of sales, the office-supply company will promote Mrs. Beasley’s sweets through E-mail to one million of its customers and will offer Mrs. B’s pastries on its site. CEO Ken Harris expects sales from the deal (which at press time was planned to begin this month) to exceed those from the 1-800-Flowers.com promotion. Discounts for AAA members. Mrs. Beasley’s offers members of regional AAA clubs a 15% discount for purchases made in stores, by phone, or online. What does AAA get out of the deal? “Zilch,” says Ken Harris. “At least financially. It’s another benefit for them to offer members.” Average monthly sales January through September: $9,300; average monthly holiday sales: $40,000. Gift for Canon/Best Buy customers. During a holiday promotion, Best Buy customers who bought Canon printers and $50 in supplies got certificates for a free Mrs. Beasley’s basket. Mrs. Beasley’s, which charged Canon and Best Buy wholesale rates, fulfilled the orders. Overall sales: $533,000. Discounts on corporate intranets. Mrs. Beasley’s partners with companies that run employee-benefits intranets at AOL, McDonald’s, Raytheon, and many other large companies. Employees receive a 15% discount on Mrs. Beasley’s products that they order from the intranets, while the intranet developers take 5% of sales made through their sites. Average monthly sales: $10,000. Please e-mail your comments to editors@inc.com.

About 4856 days ago Telecom and Wireless

Myth 3: Smart Money Makes You Smart

REALITY CHECK: Smart money doesn’t come unless you’re already smart Click here for the word from the experts Then Cliff Young was getting ready to launch his own Internet service provider, he says, “I was looking for capital, like everybody else.” He was also looking for the right investors. Smart investors. Young, a former real estate developer, thought the right venture-capital firm would provide just the expertise he needed. It was 1995, and venture firms pouring money into Internet start-ups were priming their fledgling investments with insider advice and powerful contacts. “It was well known that VCs invested in high-tech start-ups and added a ton of value,” he says. Young drafted a detailed business plan. By the beginning of 1996, it was making the rounds. “I contacted a bunch of places,” he recalls. “But venture capitalists receive thousands of business plans a week. It’s very difficult to get their attention if you’re not already on your way. With just my business plan in hand, it was hard to get even a return phone call.” Elite firms like Benchmark Capital and Accel Partners never responded to Young’s persistent queries. Even middleweight firms ignored him. “The only person who ever returned my call was a research associate at Hambrecht & Quist,” Young says. “He said it wasn’t in their area of interest.” From that point on, Young decided to forgo the extra value VCs could bring, and build his company — InternetConnect Inc. — using any cash he could get. If he could grow the Marina del Rey, Calif., business somehow, it would become more palatable to smart VCs and he could approach them again. Young hooked up with a well-connected vice-president of finance who helped to raise $1.5 million from 65 “completely passive” angel investors. The early, undercapitalized months of the company were difficult for Young, who felt hamstrung by his lack of resources. But low cash had a benefit: it forced him to concentrate on the most underserved segment of the ISP market (selling broadband service to small companies), which turned out to be very profitable. “One of the benefits of going a bit slower in the beginning is that you don’t blow all your powder before you know your business,” he says. “A lot of companies in my industry got funding and grew quickly and then realized that their margins were too low. They ended up going out of business.” InternetConnect did well, posting revenues of $500,000 in 1998. In April 1999 the smart money finally came a-callin’. Young was contacted by Bob Hoff of Crosspoint Venture Partners, in Irvine, Calif., and Matt Mochary of Spectrum Equity Investors, in Menlo Park, Calif. Young met first with Mochary, and at the end of the meeting he had a term sheet from Spectrum. Crosspoint also invested. The two firms gave Young $20 million, and Hoff helped him recruit an experienced CEO. “This gives us the opportunity to really turn on the gas,” Young exults. “Venture firms in Silicon Valley don’t fund ideas; they fund people,” says Mochary. “If you aren’t a person the firm knows as someone who has already created a whole lot of value for them or somebody they know, then you’re unlikely to get funded. If you do have a good idea, then build, it and companies like mine will come to you.” THE 7 MYTHS OF THE WEB ECONOMY Myth 1: Building a Web site is easy The word from the experts Myth 2: Traffic will make you rich The word from the experts Myth 3: Smart money makes you smart The word from the experts Myth 4: Razzle-dazzle makes Web sites great The word from the experts Myth 5: Brand is everything The word from the experts Myth 6: Wild ads make Web stars The word from the experts Myth 7: Community, community, community The word from the experts Plus: Tales my guru told me Dispatches from the Web economy Back to Intro, ” I Was Seduced by the Web Economy”