November 09, 2006

Business Review:

Earlier this week, announced third quarter results, sharing with the public a year-to-date loss of $56,000,000 on net sales of $499,000,000.

There were many interesting tidbits in their 10-Q statement. Let's explore some of the comments.

In the third quarter, and early fourth quarter, sales decreased verses prior year. This will be very interesting to follow, going forward. We all follow the online sales forecasts from folks at Forrester Research and other outlets, forecasts that suggest continued and unimpeded double-digit online growth. is bucking this trend. Management states that sales decreased due to a decline in conversion rate. In other words, traffic supported growth, but fewer visitors decided to purchase something.

It is interesting that management elected to throw the marketing department under the bus. Management is quoted as saying "The areas of our business that most directly affect conversion rate, including personalization of the website, customer retention, e-mail marketing, site design and layout are the responsibility of the marketing department". Ouch! Apparently the quality, assortment and price of the merchandise do not play as large a role in determining whether customers want to purchase anything from As a customer, do you buy from because of the merchandise, the price, or the design and layout of the site? Obviously, any marketing department can do better. Merchandisers can also do better.

Management stated that marketing expenditures were less efficient because marketing agreements with MSN, Yahoo! and AOL expired or were too expensive to cost justify. Management elected to increase spend on television and radio. This caused brand recognition to increase, but did not result in an increase in sales. Management says marketing dollars will be re-directed only to activities that increase conversion.

Technology costs increased dramatically, hurting profitability. Management states that the technology platform now supports a billion-dollar a year business.

There are several takeaways from what was kind enough to share with us about their business.
  • will probably need a 20% to 40% increase in net sales, assuming marketing expense increases at half that rate, and technology expense decreases significantly, in order to achieve break-even status.
  • Management did not publicly criticize the merchandise assortment as a reason for decreases in conversion rate. Wow. Is it possible that customers did not want to purchase what had to offer, or did not find the price of the merchandise amenable?
  • publicly announced a problem that many other online retailers are going to run up against in the future. depended upon portals for reasonably priced advertising opportunities. Conversely, Portals charge what the market can bear for the real estate they offer. As you continue to yield control of your business to MSN, Yahoo!, AOL and Google, be willing to accept loss of control over your sales and profit trajectory.


  1. Anonymous12:24 AM

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  2. Anonymous11:08 AM

    Another fantastic post, Kevin. Interesting how management seems to focus on conversion, but I'm actually wondering about other basic measurements like retention rate are doing for Some of the people visiting the site who aren't converting must have purchased before. What wasn't right about their last shopping experience?

    There is an interesting side note to the story of as well, in that anyone who followed Mark Cuban's (owner of the Dallas Mavericks NBA team) blog would say the problem wasn't conversion rate, but an "interesting" CEO.


    ...or just do a search for "Patrick Byrne conference call"

  3. Anonymous11:28 AM

    Kevin it isn't clear to me that Byrne is focused on much of anything other than short sellers and his multitude of critics.

  4. Anonymous11:57 AM

    Back in the day, I had a boss who used the phrase "fun stuff" a lot. The links both of you forwarded fall under that category!

  5. Anonymous9:14 PM

    Overstock is my favorite store as I like shopping on this store at It provides bundle of fresh coupons .!!


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