April 05, 2007

The Role Of A Website In A Website-Only Business

Business is fun when all sorts of different strategies have a chance to succeed.

In the last month, I've probably heard at least a dozen highly-qualified, experienced and bright leaders suggest that catalogs are responsible for driving at least 75% of all the sales that a website receives.

If we listened to all of our industry leaders and vendors, we'd believe that a web-only business strategy could not possibly work.

I really enjoy looking at the business model being managed by the folks at Zappos. This web-only strategy is responsible for close to a half-billion dollars of gross shoe sales, during 2006.

Does that number resonate with you? This company is less than ten years old, does virtually no traditional marketing, no catalog marketing, and generates in the neighborhood of a half-billion dollars of gross sales. Half-billion.

If you are a catalog industry leader or vendor, how do you explain this? How do you defend the catalog model of advertising in light of these results? Please leave your comments below.

Some folks will tell you that Zappos has yet to deliver a profit, and suggest that is proof that a web-only marketing strategy cannot work.

If a web-only marketing strategy did not work, Zappos would not generate close to a half billion dollars of gross sales. Customers are clearly endorsing a web-only business strategy. Management needs to figure out how to make money from a half billion in gross sales.

With just one channel, management needs to determine whether they are in Retention, Hybrid or Acquisition Mode. But more importantly, management decided that regardless of the mode, they need to GROW. You can only grow that fast by rapidly acquiring new customers. Zappos is spending a lot of money to acquire as many customers as possible. They succeed in doing this by offering free shipping, and now, by offering free overnight shipping. They lure customers via online advertising.

Zappos uses every square inch of the homepage. In fact, I counted more than 160 hyperlinks on the homepage alone. This is not a clean, easy to read, brand-friendly presentation. Obviously, the customer likes it. Think of the hundred years of brand heritage my former employer, Nordstrom, has in selling shoes. How does that stack up online, verses Zappos, with no brand heritage?

Multichannel Forensics
come into play in a web-only business when evaluating merchandise. Zappos has eight merchandise divisions featured on the bottom of the page. It is highly likely that one of those divisions drive the lion's share of customer acquisition --- fueling future sales in all other merchandise divisions.

It would also be interesting to see how much demand is generated by the top ten percent of the 151,000+ styles they maintain on their website.

In a web-only business, the website is everything --- getting people to visit the website also means everything. I've observed comments in blogs where it appears Zappos employees leave hyperlinks to various products. Marketing an online-only business requires a completely different mindset than the mindset catalog/retail leaders have. It requires a different version of marketing DNA. I'm not convinced a lot of prior catalog/retail leaders have what it takes to run an online-only business strategy.

The online-only business model requires a fierce focus on new customer acquisition, and a shift in Multichannel Forensics from how channels interact with each other to how merchandise divisions interact with each other. Once the leader understands how merchandise divisions interact with each other, keyword/search strategies can be employed that maximize customer acquisition opportunities.

Your turn ... why is Zappos successful? If pundits continue to harp on multichannel strategies, why do customers flock to Zappos, a single-channel brand?

8 comments:

  1. Zappos success clearly shows that a web-only business is viable, however I don't think this indicates that the catalog is dead.

    Zappos could likely increase revenue (and perhaps turn a profit) by smartly sending catalogs to boost retention or acquire new web customers. The catalog may not be a 104 page index of products, but rather a small, timely, personalized catalog.

    Many of today's MC firms tend to see this issue from the opposite perspective. Instead of looking to add catalog's where needed as an acquisition boost or retention driver for web customers, we spend hours creating rules of how web dollars should flow back to a specific catalog for the supposed catalog customers who've "chosen to place their order online."

    The distinction between web as an order channel and as a store needs to be recognized. Instead of moving web revenue to the catalog base, we are moving towards the web being "the new base" and catalog being a marketing vehicle.

    Zappos shows that a single channel brand can work - but to me the real learning is understanding that inside all of our businesses there exists a 'Zappos Component,' that is web customers who don't need a catalog. Find them, save ad cost, reinvest the advertising $ into more promising vehicles, and watch sales grow. Its the new school of MC marketing!

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  2. Well said, Ray. Thanks!

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  3. Don't mean to quibble with you guys, but.... Zappos is not a "web-only business".

    There's a 24x7 toll-free number advertised right on their home.

    That makes at least 2 channels that customers can reach them through.

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  4. I had several discussions with folks at the NEMOA conference about the point you bring up.

    Down the road, there will be a better distinction between the advertising channel (catalog, e-mail, search, portals, affiliates) and the order-taking channel (retail, telephone, online).

    In that world, Zappos is not considered a single-channel or web-only business.

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  5. Zappos is successful because they (in no particular order) have great service (bizrate ratings), low prices, free shipping, and (so critical for buying shoes through the mail) free return shipping.

    I don't see Zappo's success as uniquely due to the web (save for the selection breadth) or uniquely due to single channel. (As opposed to, say, Netflix, which simply couldn't have existed preweb).

    Zappos' success (in terms of revenue and growth, not commenting on their profitability) seems pretty simple: Zappos offers a better value proposition to their customers. Execute that strategy day in and day out, maintain service levels, keep prices low, and $500mil top line in under 10 years makes sense.

    -- Alan

    (disclosure: Zappos customer)

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  6. I recall being in meetings at my last employer --- I would use Macy's as a comparison to Zappos, since folks were a bit more objective when I did that than when we discussed our company verses Zappos.

    I would take a $112 pair of boots that had free shipping, no sales tax, and free returns, and compare them with the same $109 pair of boots at Macy's that would cost $16.95 to ship, would arrive in a week, and would have $10 of sales tax.

    At $112 verses $136 at Macy's Online ($117 at a Macy's Store) , I'd ask my co-workers which option they would choose.

    About half would choose the store. Almost nobody would pick Macy's online. About half would pick Zappos.

    This, to me, is the biggest challenge multichannel retailers face. The in-store experience is a huge advantage. But online (and in catalog advertising), unless the multichannel retailer can execute like Zappos, online growth may eventually stall.

    Ray / Ron / Alan --- thanks for your comments!

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