Yes, We’re Online
Chuck McGonagle attended the recent Internet Commerce Expo in Anaheim to see how other companies are profiting by selling goods in cyberspace. Trouble is, he couldn’t find any.
“The only people making money on the Internet right now are those who develop the Web sites and access tools and those putting on the seminars,” said McGonagle, a marketing manager for New England Business Systems, a Massachusetts-based business-forms supplier that launched its own site in August. “But that doesn’t change my perception about the potential of this medium.”
Hope springs eternal in the world of Internet commerce, particularly for retailers hoping to attract customers through online shopping. This year, cyber-shoppers will spend about $1.3 billion, and the figure should top $7 billion by 2000, according to Jupiter Communications, a New York-based market research and consulting firm.
That’s a blip compared with traditional catalog sales, which are expected to reach nearly $75 billion in 1996. But it is the growth rate of the medium--online sales are expected to double in 1997--that has captured the attention of would-be cyber-merchants like McGonagle.
Still, many companies are now discovering it’s not as easy as hanging out a shingle in cyberspace and watching the bucks roll in. Consumer-oriented sites are among the least likely Web-based businesses to be profitable, according to a June survey by Peterborough, N.H.-based ActivMedia Inc.
So what does the minority of successful Net vendors know that the majority has yet to figure out?
For some, such as computer auction firm Onsale (https://www.onsale.com), it’s a matter of targeting the right product at the right audience at the right time. Others, such as Virtual Vineyards (https://www.virtualvin.com), have created a chummy outpost in cyberspace centered around the personality and expertise of their online wine expert. Shirts@Cost (https://www.cottonshirt.com) offers rock-bottom prices and no-hassle returns.
But the common denominator among all businesses currently profiting from the Internet is that they treat it as a new medium and exploit its unique interactive qualities, rather than just using it as a new means for doing business the old way.
“It’s not as simple as taking orders online,” notes Onsale founder Jerry Kaplan, who says sales at his Mountain View, Calif.-based company are expanding at a rate of 20% to 30% a month. “We set out to create an emotionally compelling experience.”
With no shortage of places for consumers to purchase computer equipment, Kaplan designed Onsale to give them an experience they can’t get at the local mall. The Web site functions as a live auction, where computer enthusiasts compete with each other for everything from motherboards to monitors and can keep tabs on the bidding. More than 50,000 Web surfers have placed bids since the site opened last year.
Selling computer equipment to computer enthusiasts via computer was a sure bet from a product standpoint. But Kaplan says Onsale has been successful because it has capitalized on a couple of Internet strong suits. It is timely, since consumers can see new products and fresh bids almost every time they check in. And it has pulled people together into a sort of virtual community where they can connect, if only to duke it out for a printer or software package.
Likewise, Amazon.com Inc. (https://www.amazon.com) has become the Net’s most popular bookstore, not simply because it stocks more than a million titles, but also because it has created a virtual village where authors and book lovers can interact.
Virtual Vineyards has done much the same thing with its online sommelier and co-founder Peter Granoff. His “Ask the Cork Dork” feature and pithy wine recommendations have kept sales growing at an average of 20% a month, even though the Palo Alto-based firm is more of a specialty retailer than a vast superstore such as Amazon.
Other Web entrepreneurs have found that more pragmatic incentives are needed to get consumers to shop and make purchases online.
For cyber-merchant Carl Levinson, that means undercutting prices of traditional department stores and mail-order houses by passing along savings reaped from lower transaction costs on the Web. Operating out of a $600-a-month Indianapolis warehouse with a just-in-time inventory system, Levinson sells Italian silk ties for $16 and men’s oxford cloth shirts for as low as $14.50 through his Ties@Cost and Shirts@Cost Web sites.
With most budgets for consumer-oriented Web sites ranging from $300,000 to $3.4 million and rising rapidly, according to Forrester Research, even well-established merchants can’t afford to simply get online and hope business will occur eventually.
Discount stockbroker Charles Schwab (https://www.eschwab.com), for example, offers a big inducement to online trading by allowing customers to trade as many as 1,000 shares of stock for just $29.95. In contrast, an investor purchasing 1,000 shares of IBM at Friday’s closing price of $129.38 using Schwab’s traditional service would pay nearly $300 in commission. American Airlines (https://www.americanair.com) is handing out 500 frequent-flier miles to customers who book flights using its Web site through the end of the year. Book Stacks Unlimited Inc. (https://www.books.com) gives buyers credits toward free books with every purchase.
“It’s the carrot approach,” said Jill Ellsworth, a Net consultant and author of “The New Internet Business Book.” “Smart retailers are offering shoppers an incentive to get online and giving them a reason to keep coming back.”
Just like retailers on Main Street, cyber-merchants are finding that one of the biggest challenges is getting traffic into their stores.
Online advertising rates are comparable to conventional mediums, according to Jupiter Communications analyst Peter Storck. That has made it tough on small businesses that can’t afford to spend the $20,000 or so a month it takes to have a heavily circulated ad banner on a major search engine.
Internet malls are the next step in bringing buyers and sellers together within the infinite expanse of the electronic frontier. Just like conventional shopping, the idea is that consumers will be attracted by the convenience of finding everything they need under one roof--or, in the case of cyberspace, at a single Web address.
IBM Corp., with its World Net (https://shop.ibm.com), and Time Warner Inc., creator of DreamShop (https://www.dreamshop.com), are among the first major developers of virtual malls. A slew of large and small competitors are expected to join the fray, anxious to sell stuff to the 163 million consumers expected to be online by the turn of the century.
Technical limitations continue to hamper the expansion of online shopping. Security systems have yet to be perfected that would let electronic payments flow through cyberspace in complete safety. Thus, some consumers are leery of thieving hackers and other potential electronic chicanery.
But Jeanne Dietsch of ActivMedia says all the concern is more a product of media hype. She says their surveys of online retailers show that many are already successfully processing credit card transactions over the Web in relative safety, and that consumer hesitance is the real barrier.
“Security is not a major inhibitor,” Dietsch said. “It’s just a matter of people becoming acclimated.”
Far more constricting, argues Dietsch, are technical limitations such as bandwidth and modem speed--or rather the lack of them.
A company may include sumptuous pictures, elaborate graphics and a multitude of screens on its Web site extolling the merits of its product. But they won’t mean much to the consumer stuck with a 9,600-baud modem who runs out of patience downloading them.
Such technical hurdles will ultimately be jumped with the widespread use of cable modems, direct Internet access and other speedy tools--but it will be many years before they are widely available.
And companies had better be ready, says consultant Ellsworth. That’s especially true for companies that sell goods and services to businesses, an arena experts agree will be much more important in the short term than consumer sales.
