Buy.com May Fail, but if It Succeeds, Retailing May Never Be the Same
David:
Here is an article I found in Fortune Magazine about Buy.com,interesting read.
====================================
To become the leading e-commerce portal, Buy.com is selling consumer products at cost, and profiting through ads.
J. William Gurley
If you gave it away, would you be satisfied?
--Sammy Hagar
A few months ago I suggested that in a world where Wall Street seems to value revenues and growth more than profits, the ultimate business would be to create a Website that sells dollars for 85 cents. As the argument went, you could always make up the difference through ad revenues. This is pretty similar to what an entrepreneur named Scott Blum has actually done. Blum, CEO of Buy.com, is selling consumer products at or below cost, and trying to create a brand synonymous with low price--with the hope of becoming the leading E-commerce portal. He even plans to make up the deficit through advertising.
Founded as BuyComp.com in October 1996, the company first focused on selling computer products at cut-rate prices. Since Blum doesn't want to touch inventory, he chose to have wholesalers ship products directly to his customers. In mid-November, Blum acquired SpeedServ, a lesser-known online retailer of books and video, from Ingram, and then changed the name of his company to Buy.com. Blum wants to expand into many different product categories; he has purchased more than 2,000 domain names that begin with B-U-Y, as well as www.10percentoff amazon.com.
Buy.com's tag line, "The lowest prices on Earth," may be the most precise positioning statement ever. The company is ruthlessly committed to being the price leader--even if this means losing money on every sale. Its technology searches competitors' sites to make sure Buy.com has the lowest prices on the Web. And as far as I can tell, it does: 3Com's Palm III Organizer, for instance, sells for $249 on Buy.com: At Cyberian Outpost it's $300, $330 at CompUSA, and $369 on 3Com's own Website.
The company sold $15 million of products in October and is forecasting sales of $19 million in December. At this pace Blum believes Buy.com can break Compaq's first-year sales record of $111 million, making it the fastest-growing company in U.S. history. Of course, revenues may not be the proper metric for measuring the success of a company with a potentially negative gross margin. If all you're interested in is revenue growth, you could sell a high-priced commodity like oil or steel below cost and probably hit $1 billion in your first year.
It's easy to be skeptical of this seemingly crazy new model. Predictably, competitors who believe in the standard notion of selling goods at a profit blast the idea. It's unproven, says Julie Wainwright, CEO of Reel.com. Others point out that retailing is about more than just pricing and that Buy.com comes up short on other important metrics, such as customer service, ease of use, and overall customer experience.
True enough. But there's a lot more to learn by considering the implications of Buy.com's success than by taking the safe route and predicting its failure.
First of all, if Buy.com succeeds, we'll have proof that it is possible to build a brand completely on price. Selection, customer service, and user experience all matter, of course, but on the Web it is very simple for a consumer to experience these things on one site and close his transaction with another--the low-price leader. Several Websites offer extraordinary amounts of research on expensive brand-name products such as computers and cameras, but their prices aren't extraordinary. Buy.com's are, making it a logical final destination for any shopper.
Second, Buy.com's success could change the very way wholesalers and distributors conceptualize their businesses. Sure, extreme discounting by one reseller raises the eyebrows of a distributor's other customers. But most distributors will accept this discomfort rather than lose sales created by that reseller. The virtual reseller may lose money, but the distributor still receives its standard margin. Even manufacturers don't seem to mind having their products used as a loss leader--provided it's the reseller that takes the bath.
Capital is the natural limit to a business model in which you lose money on every sale. However, the company has raised $60 million from Softbank, the Japanese conglomerate that backed Yahoo and E-Trade. Based on its employee size of about 100 people, the company should have operating expenses of $12 million. Even if it loses money on each sale and spends marginally on advertising, Buy.com should be able to run for more than a year.
Other than lack of capital, there is little restricting Buy.com's growth. Unlike traditional retailers, Web-based sellers are not slowed by the friction of store growth and local marketing. Brand messages can spread like wildfire via bulletin boards and E-mail. More important, the virtual reseller--which accepts orders and passes them to someone else for fulfillment--is limited only by the capacity of its partners' inventory.
Buy.com's success would have an impact on all kinds of retailers--starting with Buy.com itself. If the company proves that the ad space on a product order form is almost as valuable as the product being ordered, another virtual reseller is sure to enter the market with even lower prices. That kind of pricing could intensify competition between wholesalers and Net retailers. Barnes & Noble's acquisition of Ingram Books may be the first in many channel-consolidation mergers. Brick-and-mortar resellers, pressured by the contraction of the customer supply chain, may be forced to restructure. Finally, manufacturers may be increasingly pressured to drop-ship directly to the consumer. Of course, there is one big winner: you. It's never been a better time to be a customer.
--------------------------------------------------------------------------------
J. William Gurley is a partner with Hummer Winblad, a venture capital firm. To receive an expanded version of his column, Above the Crowd, visit www.news.com; to subscribe to the E-mail distribution list, send E-mail to listserv@dispatch.cnet.com with the following in the message body: subscribe atc-dispatch. If you have feedback, please send it to atc@humwin.com
Magazine Issue: January 11, 1998
Vol. 139, No. 1
Your Opinion
Will e-commerce change retailing as we know it? Speak Here!
Paints December 30 01:16 PM
it would be nice to be able to buy books, video cassettes, and cds all at the same price, without going to amazon.com, barnesandnoble.com, borders.com, etc. We shall see. I don't see how their business model will prove successful, although they've raised capital -- bless their hearts. Positive revenue stream, no earnings. Sounds like most hot Internet stocks.
--------------------------------------------------------------------------------
Grace L. December 31 12:53 PM
But have you ever tried to RETURN a buy.com purchase? It is a hellish process! Plus, they charge a 15% "restocking fee" on all non-defective returns/exchanges...
I would gladly pay a bit extra--or even visit a brick-and-mortar store--for a less customer-hostile shopping experience.
--------------------------------------------------------------------------------
saurabh sharma , sasartha@yahoo.com January 03 11:43 PM
This company could have a profile like $ 10b in sales , net profit $ 160 m , shareholder equity , $ 100m ...and resemble the profile of a finance company...will it last ? Well, the best of finance companies have....
--------------------------------------------------------------------------------
mishal lib January 04 01:26 PM
basically,this is the way the media works newspapers etc.,
--------------------------------------------------------------------------------
Mike Robinson January 10 09:15 PM
Sooner or later the advertisers are going to wake up & charge a fee for ads & the right to sell their products. Currently the banks charge you to use their ATM's so why not charge you to sell their products. The long term effects could result in decreased buying power of the average consumer due to the constant downward pressure on wages. In the words of a long forgotten marketing professor "If price were no object, I could sell anything". Zero profits equal zero purchasing power.
--------------------------------------------------------------------------------
James Hanson January 12 05:27 PM
E-commerce will definitely change retailing as we know it. It already has. Consumer trends change. First, there was franchising and discount stores. The only problem, is that stores have huge overhead costs. E-commerce changes that. Now, companies can cut costs and offer their products cheaper. There will always be the few people who enjoy paying 30-60% more for products and services. However, the majority of consumers want to save time and money. E-commerce is the way to get products and services to consumers cheaper and more convieniently than stores.
About the Amway e-mall... If anyone can do it, this is the company. It already has a 3 mil.+ consumer base, plus over 1200 companies already using it's distribution system. It obviously works well for them and all the companies and business owners involved. Put all that into an e-mall and you have huge success. I'm betting on Amway's e-mall to make a lot of people a lot of money.
Just like with anything else, you'll have those who profit fro
--------------------------------------------------------------------------------
Sue C., Sue2Type@aol.com January 13 11:02 PM
Combine e-tailing with owning a business of your own and you have the ideal. Buy from your own business the things you use everyday and have it delivered to your home. Tell others about the idea and get referral bonuses. It's time for everyone to take a second look at Amway. It's not just a soap business anymore. And if you want to return a product, they pay for or refund the shipping cost. It's a great company!
--------------------------------------------------------------------------------
Paul Trautman January 14 09:11 AM
If Buy.com is only using prices on the internet to determine "the lowest price" they are a long way from selling things at cost. Most internet prices I see are close to manufacturer's suggested retail prices. To find the loswest price in a market you have to get off your fanny and away from the monitor long enough to go out and shop.
Won't the logical extension of all this type of commerce be that manufacturers will be able to sell direct to consumers; eliminating all middle distribution?
pathfinder.com
|
