April 2000   

An Egghead’s View of Online Business

For example, in 1984, Egghead Software opened one small store in Seattle and in the next decade grew to a national chain with 200 stores. Egghead Software metamorphosed into Egghead.com, which operates only online. The company has no intention of reopening retail stores, says its vice-president of sales and operations, Norman Hullinger.

"If I were to start any business now in anything that could be considered a commodity, branded product, I think the Internet would prevail," Hullinger advises. "I grew up in a BAM environment and transformed myself into an Internet guy."

"The Internet was not an option until 1995-1996 and until we started seeing a decline in performance of the stores. We looked to the Web as a means of growing the business, but we thought to continue in the BAM format. The Web site took off so well that we had to go one way or the other."

Cyberspace is a great place to do business if you are selling computers and related products or technical products; but a business focusing on fashion, for example, may do better in a BAM environment than online. Hullinger believes a business start-up will find it "almost impossible to build the infrastructure needed to do both (BAM and online) well."

Leading Cheers for an Online Business

Sherry Rand echoes Hullinger’s comments about specialty products selling well on the Web. Her Salisbury, Mass. company, Pom Express has doubled its annual sales of accessories for cheerleading and dance teams every year for the three years it has been online.

Rand once operated a BAM that sold team uniforms and general sportswear. "We stretched ourselves way too thin," she says. "I decided to stick with a certain product that I could order and have drop-shipped and not have to worry about inventory. As our business began to grow, the Web grew. Our customers have become more and more attuned to the Web."

Rand also publishes mail-order catalogs but is sending out fewer catalogs as her Web business increases. The Web site allows her to add and subtract products from her inventory without printing a new catalog.

Rand made most of her BAM sales in the New England area; now she has customers from all over the world. Like Hullinger, she believes that customer service is vital. She sends product samples to customers before they order. "We have problems getting samples returned, but it’s worth it, even though it’s an expensive program."

Some customers are reluctant to order online, but Rand accepts orders via email or a telephone call. "We try to make it as easy as possible for them," she says. "We want them to feel as comfortable as they can."

From these testimonials you might have already gleaned the

Advantages of Doing Business Online

• No geographic limitations

• World-wide customer base

• Smaller start-up costs

• Lower overhead

• Greater volume of sales

• More repeat business than a BAM

• A larger selection of products

• Ability to track customer activity on-site and personalize information and product offers

• 24/7 business hours

• Shopping convenience

• Ability to deliver large amounts of product research and information

• Ability of customers to make more of their own decisions instead of relying on sales agents

Still, many retailers can point to the

Advantages of Doing Business in a BAM

• Higher gross profit margins

• Ability for customers to see and touch products

• Smaller advertising budget requirements

• Acceptance of cash payments

• Less customer concern about using a credit card

• Immediate customer gratification

• Easy merchandise returns

What does all this mean for you? Here’s how you might proceed:

Assess Your Options

1. Online. At first, an online store might seem best. After all, more consumers are connecting to the Internet, and online shopping is constantly on the rise.

The Census Bureau of the U.S. Department of Commerce recently released its first estimate of U.S. retail e-commerce sales. Those estimates, which do not include online travel services, ticket sales agencies, or financial brokers, place U.S. retail e-commerce sales for the fourth quarter of 1999 at $5.3 billion. That equates to 0.64 percent of the total retail sales estimate of $821.2 billion.

Keenan Vision, a microanalyst company that also advises businesses on Internet-based prosperity, estimates that the number of e-merchants in the U.S. will increase from 70,000 at the end of 1999 to 2.6 million in 2004.

2. Brick-and-mortar. But businesses shouldn’t begin dismantling their BAMs. In fact, a December 1999 report by PriceWaterhouseCoopers predicted that brick-and-mortar businesses "will remain the dominant distribution model, as retailers will stay as close to their customers as they need to survive."

3. Click-and-mortar. Many online businesses are establishing, buying, or creating alliances with BAMs and becoming "click-and-mortar" companies that offer the advantages of both types of retailers. In 1996, for example, Gateway began operating Gateway Country stores, and last year, Amazon.com and Sotheby’s auction house announced plans to create a joint online site.

Warns Hullinger, "I wouldn’t necessarily say, if you’re already a BAM player, that the right thing to do is get out of the bricks-and-mortar environment. Click-and-mortars have strong potential for someone established and with a significant amount of recognition."

Meanwhile, BAMs are establishing Web presence. Stambaugh Hardware Co. has changed its focus from home centers that stock everything a home remodeler might need, to neighborhood stores that carry supplies for repair projects. But these smaller stores have Internet kiosks where customers can access the company’s Web site and choose from more than 50,000 products.

Furniture retailer Ethan Allen and Circuit City  both allow customers to order online, then pick up their merchandise at a local store. This way, customers never have to pay shipping charges.

Shoppers who prefer to research and browse through the inventory online, then buy at the BAM, like these click-and-mortar businesses.

Factor in a Few Things

• Cost. It's cheaper to build a Web site than to buy a store building.

• Advertising. An online business's profits must offset the increased advertising expenses required to attract customers to the site. BAMs can use their stores to promote their Web sites.

• Type of merchandise. If your products sell better when customers handle them, think BAM. If you have to educate the customer about the product, think Web site. Niche businesses, such as a travel agency or a retail outlet with a specific product line, have been successful on the Internet, although more recently, online businesses have been widening their product line. A niche product involves fewer suppliers, is easier to advertise, and is simpler to ship.

• Size of inventory. An online store can offer a wider variety of products at a lower price than a BAM, which must keep the products in stock and which has higher operating costs than a Web site.

• Product delivery. If customers want to pick up their purchases themselves, a BAM will please them. If you are online, you should ship merchandise quickly and economically.

• Marketplace. If the market for your product exceeds the geographic limitations of a BAM, an outlet in cyberspace might be for you.

Take a Quiz

The Service Corps of Retired Executives has a checklist of five questions to help you determine whether you should put your business online. You can see it at: www.inc.com/articles/details/0,3535,ART15705,00.html

Know the Keys to a Successful Web Sales Site

• Convenience. A PriceWaterhouseCoopers survey of Consumers’ 1999 Holiday Shopping Behavior indicates that convenience, not price, was a major reason for buying online.

• Site design. Consumers should find the site easy to use, and they should be able to find information about the merchandise.

And Consider Egghead.com’s Must-Haves for a Successful Online Business...

• Customer retention. "Customer acquisition is more expensive than anyone thought it might be; therefore, customer retention is important," Hullinger says. "It’s much easier to retain customers than find new ones. As long as you’re competitive and provide service, once you get a customer on the Internet, it is proven that you can keep them with customer services on the back end."

• A good product.

• Competitive prices. Brick-and-mortar retailers have difficulty competing with prices offered by online businesses, Hullinger says.

• Strong customer service and support. "Ensure that you build your back-end infrastructure as aggressively as you build the front-end site," Hullinger says. "Good, old-fashioned customer service is just as important on the Internet as it was in the pre-Web days."

Then Do What’s Right for You

Your business may be one of the 2.6 million expected to be operating online by 2004. But if you go online, do so not because "everyone should do the Web," but rather because a Web site would serve your customers better and make your business more successful than a brick -and-mortar store would. Picking the right location to set up shop is an important part of setting up your business. Setting up shop in cyberspace can expose your product or service to customers around the world instead of just in your hometown. But you must still ensure that those customers will be likely to buy what you want to sell. And then you must be able to sell it to them in a way that they perceive to be at least as easy and relatively risk-free as shopping at the local mall.