- 11 May, 2001 13:26
Shipping sofas and bedroom sets all over the country is expensive. Better not offer your customers free delivery and returns, like Furniture.com did (before it went out of business).
There's one lesson learned.
Here's another: Stand ready to change your business model on a dime when the dollars don't flow. That's what happened to iWant.com, the former online marketplace for consumers that quickly morphed into a service provider for advertisers on the Web.
Last year CIO profiled six companies and their e-commerce business models in our Case Files series. Now we're looking back to see how they did and what we can learn from their experiences. We found both folly and wisdom in this tribe of e-business entrepreneurs.
"The psychology a year ago was very exuberant toward dotcoms and now is rife with cynicism. The truth is somewhere in between," asserts Randall Hancock, senior vice president at Mainspring, a strategy consultancy in Cambridge, Mass. "There was a tremendous amount of innovation and a tremendous amount of learning that took place over the last year."
Furniture.com Made Too Many Promises It Couldn't Keep The best-known dotcom we dug into last year was Furniture.com - both in life and in death. Furniture is a notoriously tricky industry. But in January 2000, executives seemed unfased; they promised Web shoppers 24-hour browsing and six- to eight-week delivery times on everything from table lamps to 10-piece bedroom ensembles.
Convincing customers to buy furniture online was the easy part. The company reported US$22 million in net revenues for nine months ending September 2000 - more than twice the total 1999 net revenues - and attracted 1 million users a month.
But with the increase in usage came a dramatic jump in customer dissatisfaction. Customer complaints filed with the Better Business Bureau (BBB) in Worcester, Mass., leapt from one in 1999 to 149 in 2000, steep even by dotcom standards, says Barbara Sinnott, president of the Central New England BBB. Most brick-and-mortar companies get three to four complaints a year, tops. The leading complaint: delivery problems, followed by product quality and bill disputes. (Attempts to reach Furniture.com CEO Andrew Brooks were unsuccessful.) While executives built the Furniture.com brand like nobody's business, they neglected to create the infrastructure to support it. The company failed to factor in the logistics and costs involved in shipping such a bulky commodity cross-country and had no way to track orders.
"Right down to the very last day, they still couldn't make a decision on an information tracking platform," says Ian Nickerson, president of Global Logistics Solutions of Dennis, Mass., one of Furniture.com's regional logistics partners. "We invested a lot of money in technology to track orders so that they could let customers know where their delivery was in the system. But we ended up having to do everything manually."
Furniture.com also created a cancellation policy no furniture company could afford. Contrary to the no-return policy we had reported, customers could cancel orders right until delivery day. With six-week waits turning into six-month delays, a third of all orders were cancelled. Local logistics companies had warehouses of unwanted furniture, according to Nickerson. The result: storage costs that surpassed the already astronomical shipping costs Furniture.com footed for customers.
"They didn't understand the supply chain dynamics well enough, and they didn't understand fundamental operations strategy," says David Pyke, a professor at Dartmouth's Amos Tuck School of Business Administration who specializes in e-commerce and supply chain management. "Free shipping, free returns, low prices, lots of variety! How can you go wrong? Well, the customer might be happy - if the promises were fulfilled - but the company can't make money like that."
Several rounds of layoffs and US$27 million in makeshift funding furnished in June 2000 didn't get Furniture.com any closer to profitability. The online retailer, which launched in January 1998, closed its doors on Nov. 6 last year and filed for bankruptcy on Nov. 20. Early this year the company hoped to fetch US$1.5 million for its domain name and Web platform, says David Madoff of Cohn & Kelakos, the Boston law firm representing Furniture.com. The failed company was also crafting a plan to get furniture stuck in warehouses to customers still waiting for orders.
Cybersettle.com: It Takes (Lots of) Time to Lure Old Industry Players to New Online Services - Even Valuable Ones Things at Cybersettle.com aren't as grim as they were at Furniture.com.
When we observed the online insurance claims settler in March 2000, attorneys and co-CEOs, James Burchetta and Charles Brofman, hoped Cybersettle.com could claim a sizeable chunk of the US$30 billion spent on administration costs for contested property-casualty, auto and workers' compensation insurance claims each year with its patent pending online blind bidding process. The company planned to announce a third round of venture capital totaling US$30 million, with an IPO likely to follow.
Jeffrey Krivis, a private mediator and arbitrator in Los Angeles, analysed Cybersettle.com for us last year and pointed to two pitfalls: the difficulty of convincing plaintiffs' attorneys that Cybersettle.com would benefit their clients and the importance of the human touch in negotiations. Both continue to be on a growing list of concerns for the company's critics.
That US$30 million in VC never surfaced in total, although Brofman says the company has received a few million here and there from XL Capital, a Bermuda-based insurance and financial services organisation that holds a 60 percent stake in the company. (XL Capital wouldn't say how much it's given.) The IPO didn't go forward. And Burchetta stepped down as co-CEO of Cybersettle.com, though he remains chairman.
By autumn, Cybersettle.com relocated from its expensive Manhattan digs to its Westchester, N.Y., call center (losing the 30 percent of its staff who didn't want to make the move), and the company put a moratorium on marketing and began to consider mezzanine financing. All of these moves helped the company stay afloat during the market downslide, Brofman says.
Some industry watchers question how long Cybersettle.com will be able to hold on. The company maintains that it has cornered 95 percent of the U.S. online claims settlement market. But Krivis says that no substantial market for online claims settlement has been established, and Cybersettle.com's market share claim may not amount to much. The company "hasn't been a blip on the screen as far as settlements are concerned," he says.
Ethan Katsh, a University of Massachusetts professor and codirector of the Center for Information Technology and Dispute Resolution, doesn't think it's such an open and shut case. "There's a huge potential market there," says Katsh. "They're providing a lot of value in a context that is traditionally inefficient."
But both Krivis and Katsh agree it may be several years before online claims settlement gains acceptance.
Brofman, an industry veteran, expected the wait. "Our carriers are just beginning to understand the concept that we built two years ago," he says. Brofman also adds that winning new customers "is a slow, methodological process, and you need a lot of staying power to get there."
Even so, Cybersettle.com continues to face competition. Its largest rival, Clicknsettle.com, for example, has arbitrators and mediators who can work with clients offline if the online system doesn't work. Cybersettle.com has no plans to branch out beyond online claims settlement.
Cybersettle.com has 475 companies in its system, and transactions tripled in 2000, Brofman says. The website handled US$37 million worth of lawsuits, but he will not say how much revenue that represents.
This month, in what Brofman hails as a key event, the 56,000-member Association of Trial Lawyers of America was scheduled to make Cybersettle.com its official online settlement tool. iWant: If at First You Don't Succeed and You Still Have Capital, Reinvent Yourself We published our iWant story last May, just six months after the online marketplace launched. CEO Shabbir Dahod says that was the time when his management team could see the business model wasn't working. Two weeks after launching a major marketing effort, Dahod scrapped those efforts, started to save money and began to think about a turnaround.
Since then, iWant has gone from a destination site enabling individual consumers to post "wants" (so that marketers would find them and make offers) to become an ASP for direct marketers, offering instant contact between individuals and advertisers on partners' websites.
"We changed our marketing efforts. We changed our business model," Dahod says. "We changed just about as much as you possibly could." iWant's new opt-in technology, used by websites such as CoolSavings.com, Smarterliving.com and WebStakes.com, plus more than 20,000 affiliate sites, lets customers request an offer geared to their purchasing needs, be it a trip to Bermuda or a lightweight laptop. The ASP, which appears on partner sites with no visible iWant branding, immediately reveals a list of offers from its advertisers to meet those needs.
Dahod says the new strategy provides click-through rates of around 35 percent to 40 percent, 100 times better than banner ads and 10 times better than opt-in e-mail programs; conversion rates average 4 percent to 5 percent, with some up to 35 percent. Those numbers and iWant's 10 percent click-through guarantee have convinced 1,200 advertisers from Dell to Toyota to use iWant's opt-in program.
The opt-in idea was not a new one for iWant. It was one of a handful tossed around in the early days of the company, set aside in favor of the first business model.
Dahod says he will continually refine iWant's business model, though he doesn't expect to make as dramatic a change as he did during the last year. He plans to hit the road in the first half of 2001 to raise more money to expand his sales force. "Less than US$10 million" should do it, he says, though he knows funding is scarce. "I've been in the high-tech industry 16 years, mostly at startups, and I have never seen so much ridiculous positive euphoria convert to so much ridiculous negative skepticism in a span of 12 to 18 months. I'm just worried that we won't be able to make the progress we need to make in such turbulent waters," Dahod explains. iWant's investors, Matrix Partners of Waltham, Mass., and Pequot Capital Management of Westport, Conn., played an active role in iWant's repositioning. "Oh yeah, I beat them up about everything that wasn't working," says Andy Marcuvitz, a general partner at Matrix Partners. Marcuvitz says that iWant is now better off. "That's easy to see from the reception they're getting from customers," he says. "The thing that is unavoidable, however, is that this is a more hostile [venture capital] environment."
Carfax Finds First-to-Market Helps, but the Jury Is Out on TV Ad Spending Carfax is not your typical dotcom. When we wrote about it in July 2000, it had already been in the vehicle history report business for 16 years. In fact it was the only company in the vehicle history report business.
"The Internet was just a new way for us to reach the consumer market," says Carfax President Dick Raines.
That's what Carfax continues to do - use the Internet to expand its business beyond its original customer base of used car dealers in an effort to saturate the used car buying market. When we looked at the company, it had just spent US$20 million on print and TV ads to attract those customers to its website to purchase a Carfax report for US$14.95 or six days of reports for US$19.95.
Results from that sizeable expenditure have not been overwhelming, although Raines says the number of Carfax users and revenue-sharing Web partners have increased. Carfax is investing another US$20 million in radio and TV ads for 2001, with spots that began in March and continue through year's end.
"Other dotcoms have discovered that marketing campaigns won't produce payback right away, and I certainly wouldn't kid myself about that," Raines admits. "But we saw it as a long-term investment."
Funded by privately held R.L. Polk, a Southfield, Mich.-based automobile information services company, Carfax is on a path to profitability, Raines says. "We've been at this for more than 15 years, but it takes that long to build a quality product," he says.
That lead time creates an entry barrier for potential rivals that most dotcoms dream of.
"Carfax has content no one else has," Mainspring's Hancock says. "Their proprietary database gives them an advantage since they have no real competition." However, Hancock, who analysed the Carfax model for us last year, remains concerned about Carfax's subscription model - one that has yet to be proven in the dotcom realm.
But aside from the end of its marketing blitz, Carfax shows no signs of changing its strategy. The company continues to add free features to its website offerings (like its Find a Car function) and upgrade its subscription-based service by adding information sources.
In January, Carfax launched an affiliate program for small dealers' websites and a cash-back program offering customers 20 percent of revenues received for their referrals. "We continue to look for more and more ways to add value," Raines says.
AFS Learns It Can Be Better to Merge Than to Fight On American Floral Services (AFS) had a tough row to hoe when it appeared in CIO last September. Facing stiff competition from rival floral wire services FTD and Teleflora and a static number of independent flower shops and wire orders, AFS hoped to use the Internet to grow its market.
And it did, in a way. On Nov. 17, 2000, Teleflora announced it had acquired the Oklahoma City-based company and AFS became part of the largest floral wire service in North America. In fact, AFS's IT efforts attracted Teleflora.
Teleflora has strong consumer brand awareness, but its Internet strategy was lacking. "We were a lot stronger in that area," explains Tom Butler, former CEO of AFS and now chairman of Teleflora. "The only way we're going to grow the [merged] company is by growing our services, and Internet services are a big way to do that."
In January, Teleflora handed out pink slips to 25 percent of AFS's staff and moved administrative personnel to its Los Angeles headquarters. Most layoffs were in marketing, finance and sales - Teleflora's strengths. But the merged company's IT department led by AFS Chief Technology Officer Terry Byers remains in Oklahoma.
Byers is pursuing most of the same technology proposals she was at AFS: back-office floral management technology for retailers, website creation for member florists and eventually a B2B marketplace for the floral industry. Teleflora also is moving to the Lawson ERP package implemented by AFS.
With the merger, Teleflora could offer florists a menu: AFS's midmarket Eagle FMS, a Windows-based floral management system (US$10,000-US$25,000), Teleflora's high-end UNIX-based RTI system (US$30,000-US$50,000) and its low-end DOS-based Daisy system (US$10,000). Within a couple weeks of the sale, Byers' staff launched Teleflora.com, and B2B plans are brewing. (The AFS team did ditch EagleNet, its private network wire service, in favor of Teleflora's more established Dove Network.) Teleflora now works with 33,000 florists in North America versus 18,000 served by biggest rival FTD. Online, the competition remains real. FTD.com, the publicly held company created by FTD, announced in January that it had posted a second straight quarterly profit and that it would stay in the black for the rest of 2001.
EqualFooting.com Takes Two Downsizing Steps to Keep Its Balance Last November, we looked at EqualFooting.com's plans to put small businesses and suppliers on a par with the big boys in the areas of purchasing, financing and shipping. As of September 2000, the online marketplace company had garnered US$70 million in funding and even turned away some venture capitalists.
But making the business model succeed seemed like mountain moving. EqualFooting.com attracted more than 180,000 small-business customers since its launch in March 2000, but it wasn't using the service enough to justify the acquisition costs - an all-too-common lament for online sellers.
Two big strategy shifts followed. The first, in November, was an attempt to cater to a few big customers rather than many little ones. The second came in March: Focus solely on providing online financial tools to other companies.
On Nov. 8, 2000, the Sterling, Va.-based company laid off its direct-marketing staff and changed its distribution model. EqualFooting.com forged partnerships with companies that already marketed services to its target audience of manufacturing and construction companies. At the time, Jim Fox, EqualFooting.com's CEO, said the move took care of "some of the big challenges of e-commerce like spending enough marketing to get people to your website and still having enough money to run the business."
But by March, the company again had narrowed its sights - and its payroll. EqualFooting.com laid off another 120 workers (about 60 percent of its staff) and said it would focus exclusively on its proprietary credit origination platform called Equidity.com.
This kind of technology offering was already part of EqualFooting's model. Equidity.com is leasing its financial software to financial institutions, manufacturers and online B2B exchanges.
Private labeling technology has become a trend among dotcoms, particularly online marketplaces. "If you've developed a technology that's useful and you can build a good business case around it, it's easier to grow your business in the short term when you can find a client that pays you US$250,000 for your technology rather than a small transaction fee," Hancock says.
With this new strategy, concerns about EqualFooting's old fee structure (5 percent for suppliers) and its method of forcing suppliers to compete solely on price are no longer relevant. And unlike many dotcoms, EqualFooting began restructuring while it still had cash.
That kind of swift action speaks in EqualFooting's favor, says Fern Halper, vice president of e-business strategies at the Hurwitz Group, a Framingham, Mass.-based consultancy. But its revised model puts EqualFooting in competition with big names in online loan originators like eCredit.com. And EqualFooting still must execute.