Poor Product Choices Doom E-tailer E-failures

When will people learn that e-business still has the word business at its center? Judging from the string of high-profile casualties being dragged out of the Internet retailing space, the lesson is being learned by more people than ever. But there are still plenty of sites out there selling inappropriate items (or selling the right products in the wrong way) that are living on venture-capital-financed borrowed time. Keep your fire extinguishers handy; a lot more e-tailers are going to be crashing and burning in the very near future.

The flip side of this phenomenon is the tendency by too many to assume that e-tailing is a recipe for catastrophe, a business plan that can't succeed. That's just as poor a vision of the Internet as any held by the recent e-tail failures.

The Internet is just another means of getting a message across to consumers. It reaches into people's homes and attains global coverage, and it does so relatively cheaply. But you can't sell caviar out of a corndog stand,you have to pick your product and your venue so they work together.

Too often, venture capitalists were willing to give money to any start-up who identified a lucrative retailing space as its e-tailing target. Usually, these start-ups picked a real-world product or service,books, clothing, food, pet supplies,and then sought to woo customers away from the traditional real-world outlets.

In many cases, this approach makes as much sense as trying to market binoculars to the blind. The prevailing attitude was that, if buying a product from a brick-and-mortar establishment was good, then buying it from the Internet would be even better. That isn't the way it works. The product, the audience and the medium have to be in synch if a service is to succeed. If not%85well, look at Pets.com.

As we reported in VARBusiness last month, the online pet e-tailing space was a crowded place, with numerous competitors vying for a finite number of customers. Some had already fallen by the boards; some have been run over by the speeding car of the bottom line since our article. Petopia.com has laid off 60 percent of its workforce and Pets.com has announced it was closing shop. Pets.com spent more than $70 million on marketing in its short life, yet this most visible of pet e-tailers has become the industry's most notable failure.

The factors that caused this failure are the result of basic business mistakes. Pets.com spent an average of $400 to acquire each customer, then sold a product mix that included low-margin commodities like dog food. The goal was for the site to outlast and outspend its competitors and then adjust prices when the competition wasn't so fierce. As it turns out, Pets.com was the company that faltered first.

Another of Pets.com's bad decisions was the use of much of its capital to reinforce its brand. In creating its sock puppet mascot and advertising much more heavily than any other pet e-tailer, Pets.com didn't succeed in branding itself so much as it did in spreading news about the entire online pet space. Its competitors, all with similar names, benefited as much from Pets.com's campaign as it did. The campaign may have pumped more revenue in all the pet e-tailers' direction, but it did little to establish Pets.com as a leader.

Finally, Pets.com and the other e-tailers in the space made a fundamental mistake: they picked the wrong products to sell. By thinking they could displace pet stores as a principal outlet for selling pet store-style products, they developed a product mix that mimicked what was already readily available to most consumers. Most of these sites tried to offer some content to create an "experience," but the shopping experience being created by modern pet stores,combining large varieties of products, veterinary care, training classes, and a pet-friendly attitude that allowed customers to shop with their pets,is far richer than the Internet allows.

That's the intrinsic problem many e-tailers face: the inability to chose products that are more effectively sold online than in the real world. Clothing shopping online requires the customer to guess at what they'd look like in the garments presented on a Web site. Attempts to sell automobiles online,without the test drive,have been woefully unsuccessful. And even groceries are a hard sell; people still want to pick out their own meat, produce and bread, despite the inconvenience of having to go to out to do it themselves.

For these products, which rely on the consumer to evaluate the product before buying, the only hope for e-tailing is to combine the Internet experience with a brick-and-mortar presence. Forrester Research revealed earlier this year that an Internet presence does not cannibalize real-world sales; instead, the two reinforce each other and more than double the average amount spent by customers who utilize both venues. For instance, a clothing shopper might go online, see something he or she likes, and then visit the real-world outlet to check for fit and make the purchase. Similarly, a customer might be undecided after trying something on, but decide to buy later and use the convenience of the online site to pay for the new duds.

The consumer products that should succeed best are ones that customers already understand,well-defined items like auto parts, books or videos. However, competitors in this space have also bled revenue because of the need to build a back-end and fulfillment infrastructure. Again, brick-and-mortar companies who already have such an infrastructure will be more successful in the long run than online pure plays.

Which pure-play companies are currently succeeding on the Internet? Thus far, the most successful have been smaller companies with narrower focuses. A great example of this is HobbyLink Japan, a Tokyo-based service that markets Japanese-made plastic model kits to customers in Europe and the U.S., who have to pay much higher prices because of the additional charges distributors add to products. The interface to the site is concise and to the point, partly by design and partly because customers know what to expect from the products. As a result, HobbyLink Japan has had to expand its warehousing capacity three times in the past three years to cope with demand and is profitable despite competition from other international players.

The lessons for solution providers are many. Look at what your potential e-tailer partner is selling; if you would be reluctant to buy it online, you can bet that the public at large will be equally reluctant. E-tailers who bring a Web-only approach to their businesses are depriving themselves of opportunities to use other channels to reach customers and should be considered very judiciously before becoming a partner. If they are embraced as a partner, emphasis needs to be placed on building the key components first, those that lead directly to revenue, starting with the backend billing and fulfillment components and carrying up through the site architecture. Finally, solution providers should not be averse to taking on smaller companies for pure-play solutions, because these companies often understand the use of the Net better than the larger companies whose commercials used to crowd the airwaves.

Eventually, we'll see the Internet's B2C sector settle into a successful groove. But, just as cars are sold in dealerships and clothes are sold at the mall, a more clearly defined product mix will be sold online. Whether it's corndogs or caviar has yet to be determined.