There's a certain cliché that gets trotted out every time you ask the honchos of Internet companies how they feel about the competition. "A rising tide lifts all boats," they'll tell you.
What they mean is that Internet usage, dollars spent online and the pools of venture capital available to Internet startups are growing so impressively that the competition-for the time being-is irrelevant. Everyone just feels buoyant and beatific about the future.
A few things are about to change that. First, Amazon.com has shown that it wants to be the Net's ubermerchant, selling books, music, toys, electronics, flea collars and Zoloft. That threatens retailers across numerous sectors. Second, 65 per cent of retailers will sell online by the end of this year, compared with 12 per cent in 1997, according to a survey conducted by the Washington, D.C.-based National Retail Federation. Finally, we're nearing the end of Year Four for a lot of Web projects launched in 1996-the year many companies first ventured online-and executives are eager for signs of an end to the red ink.
Translation: All those rising boats are loading up with torpedoes, and they won't be reluctant to use them.
"It would be nice if there was enough market share for all of us, and we could all do well," says Ned Hoyt, president and CEO of iOwn's iOwn.com, an online mortgage company based in San Francis "I think the world of the CEOs at [iOwn competitors] E-Loan and Mortgage.com, but we beat the hell out of each other on a daily basis. There's tons of competition for individual customers and competition to get the right business partners. Everyone wants to be the number-one player."
"In the Internet travel marketplace, the battle is becoming ferocious," says Philip Wolf, president and CEO of PhoCusWright, a research firm in Sherman, Conn., that specialises in online travel. "Six billion dollars of travel will be purchased online this year, and both the airlines and the Internet travel agencies want to [own] the customer. The airlines have been focused, aggressive and preemptive in the pursuit of this new distribution paradigm."
Competition in most other sectors will evolve the same way it has in travel and mortgages. I spoke with 10 e-commerce companies to compile a short course on how to prevail in this no-holds-barred competitive arena.
An ad for a Web site on TV or on the side of a city bus used to be a novelty. Now it's easier to count the ads that don't contain URLs. E-Trade Securities and Discover Brokerage Direct , Preview Travel and Sabre 's Travelocity.com, and Amazon and Barnes & Noble are all after consumer mind share.
"Our minds as consumers can only retain so many brand names," says Alexa dePlanque, a program director at the Meta Group , a research firm in Stamford, Conn. "And consumers don't always make rational decisions based on ease-of-use and price. If you're not one of the top three brands, the future looks pretty grim."
Established brands should build on their strengths: familiarity and trust. New brands need to be catchy, bold and easy to spell (sorry, Quokka.com). "We used to be called Sportsite.com," says Tom Romary, vice president of marketing for Fogdog 's Fogdog Sports, a San Jose, Calif., sporting goods site. "It was going to be very hard to differentiate our brand from SportsZone, Sportscape, SportsLine and Sports Authority. So we picked Fogdog because it's short, easy to spell and completely unique. It's very ownable"-meaning that it occupies a highly defensible turf.
Quickness Kills (Others)
Things happen fast on the Net. On the day in May that eToys went public, it established a market valuation of $7.7 billion-35 per cent higher than the value of Toys "R" Us , the suddenly vulnerable behemoth of the toy biz.
Would Toys "R" Us be in a better position if it had launched its e-commerce site before eToys? Absolutely. And now, after announcing that it would move the Toysrus.com subsidiary of the company to Silicon Valley, accept venture funding and bring on a tech-savvy exec to run the unit, the company has become mired in bureaucracy. Before the new Toysrus. com chief could even start his job, the company fought him over the terms on which Toysrus.com would buy its inventory; the parent company wanted him to buy on the same terms as its physical stores. While eToys seems to be cruising along in fifth gear, Toys "R" Us is stuck in reverse.
"It is simply faster and easier to react in the virtual world than it is in the real world," says Kathy Biro, cofounder and CEO of Strategic Interactive Group, a Boston-based Web development company that works with clients such as Dell Computer and American Express "We tell clients that on the Web, the normal rules just don't apply. You need to move from idea to action incredibly quickly, or momentum is lost."
Perils of Pricing
Commerce just doesn't get any more aggressive than selling goods at cost, a strategy pursued by sites like Onsale and Buy.com. But, as Biro puts it, "price leadership is a game you don't want to win." Most Web merchants would prefer to stay on the sidelines of the price wars, develop their brands, and cultivate a reputation for features and services that the discounters can't offer.
"Our message isn't about discount," says Barrie Seidenberg, chief marketing officer at Preview Travel in San Francis "It's about being comprehensive, a better way to buy travel, helping you to plan your trip." In 1998, Preview booked over $200 million worth of travel.
"There will be price-buyers out there, but if they get burnt once, they'll go back to someone who delivers every time, who has the selection, who has the value-added features," says Jeff Levitan, senior vice president of Staples.com in Framingham, Mass.
Still, it's important to monitor competitors' pricing moves, even if the market seems to have stabilised. Although Datek Online Holdings is one of the less expensive online brokers, offering $9.99 stock trades, Edward Nicoll, president and COO of the Iselin, N.J., company, says, "We are appropriately paranoid about [price] competition. We're constantly trying to do what-if analyses. I'd argue that $2.95 trades or free trades won't happen, but we do think about the what-ifs."
Why Radar Rules
Keeping tabs on new entrants is a crucial task for e-commerce players. They network with venture capitalists and read VC journals like Red Herring to see who's getting funded, scout out the smaller booths at trade shows and use online resources like CNet 's CNet News.com, VPOP Technologies 's NewsHub and PR Newswire. Scanning employment listings in an online database like Monster.com can also alert you to early-stage startups.
"The Web is evolving rapidly," says Fogdog's Romary. "In a traditional business environment, it'd be hard for sporting goods retailers to raise money and launch so quickly. But here, you have a lot of venture capital, and new entrants are coming in at a rapid pace."
(Incidentally, the week after Romary told me that he doubted Amazon.com would invade his turf because "there are limits to how far you can stretch a brand," the Seattle bookseller bought 49 per cent of Gear.com, a discount sporting goods retailer also located in Seattle.) Why Raiders Rule Amazon.com and Drugstore.com , a pharmaceutical site funded by Amazon. com, hired so many employees from Wal-Mart Stores -15 at last count-that the Bentonville, Ark., retailer sued accusing the two West Coast companies of trying to steal trade secrets. (The suit was settled out of court in April.) The incident shows just how far Web companies will go to assemble a team with the right mix of experience.
The most dynamic Web teams tend to blend experienced outsiders, energetic youngsters and long-timers with a deeply ingrained sense of company culture.
But beware of companies that fail to give employees the freedom to innovate relentlessly and compete ruthlessly. Disney is one such example, and the cost can be high: Executives who have left for other ventures include former Disney Online Chief Jake Winebaum, eToys founder Toby Lenk and Babystyle.com founder Laurie McCartney; indeed, the list of Disney refugees could continue the length of this column.
Everyone knows that increasing the size of your sales force tends to have a direct effect on your sales volume. Why, then, have traditional companies been so slow to adopt affiliate programs (the practice of making anyone who runs a Web site an extended part of your sales team)? Part of the reason is the fear of losing control, and that lets hard-driving competitors hack away at your market share.
"Setting up an affiliate sales channel brings your cost of acquisition down," says Gordon Hoffstein, president and CEO of Marlborough, Mass.-based Be Free , a company that helps clients set up affiliate programs. "If you're selling telephones online, and you start an affiliate program and keep your affiliates happy, then the next telephone vendor online has to go find its own affiliates. You've got the first-mover advantage, and it makes it tough for your competitors."
Hoffstein points out that Amazon. com's network of over 220,000 affiliate sites makes it hard for Barnes & Noble (a Be Free client) to catch up. Staples. com, Fogdog Sports and eToys all have affiliate programs. Toys "R" Us doesn't.
Butter Up the Boss
A Web team can't be aggressive if it's hamstrung by the company's top brass. "If there's not someone at the CIO or CEO level backing the Web site, you're in trouble," says Meta Group's dePlanque. High-level sponsorship will help ameliorate resource shortages, give the Web team a more prominent profile in the organisation and help smooth out channel conflict issues. At Staples.com, for example, Levitan reports directly to the chairman, because, he says, "this is such a high-priority project."
Capture the Customer
PC makers Dell Computer and Gateway 2000 are bitter rivals, and both are thinking about ways to cultivate loyal customers, beyond just selling them boxes. After Dell created Gigabuys.com-a peripherals, software and accessories superstore-earlier this year, Gateway followed suit with SpotShop.com. Rather than forcing its customers to go to another merchant-say, Egghead.com-for add-ons, the PC companies want to offer one-stop shopping throughout a consumer's life cycle.
Gateway and Dell also offer Internet access; Gateway's goal for 1999 is to sign up at least 800,000 of the 5 million people who have bought PCs from the company. It's all about lock-in and one-stop shopping. "This is about being able to create an environment for our users so that we can help them with future purchases, service and support," says Chuck Geiger, vice president of e-commerce at Gateway, based in San Diego. "It allows us to capture some of their time online, and it creates a switching cost.
"Anybody can sell a book or a computer online," he continues. "What creates loyalty is your brand and the service and the experience you offer. That's the stuff that differentiates you from a commodity."
And it's also the stuff to which the aggressive e-commerce players dedicate their energies.
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