Mail-Order Sales, Part II
The Growth of Internet-Based Business

by Kellye Hunter

[Editor's Note: Part I of this series covered aspects of the print catalog business, with focus on the concerns of running catalogs, and the requirements for placing your product in them. This article will focus on the potential business opportunities of the Internet, as well as offer some insight into the necessary components of an effective Web site.]

The business of mail-order continues to grow as consumers look for time-efficient ways to locate specialized products such as clothing, home decorations, and gourmet food and gift items. In fact, this method of shopping is expanding even more to include services such as travel arrangements for packaged vacations, and is slowly spreading into aspects of everyday life with the availability of nonperishable grocery items through the mail.

Consumer sales via print catalogs, according to the Direct Marketing Association, have been growing, from $33.621 billion in 1992, to $48.295 billion in 1997 (an annual growth rate of 7.5 percent), and are expected to reach $64.631 billion in 2002, which actually represents a lower annual growth rate of 6 percent. Of this, Specialty Retail catalogs saw $1.917 billion in sales in 1997, with an annual growth rate of 5.6 percent between 1991 and 1996, and a projected lower annual growth rate of 4.8 percent between 1996 and 2001. Although even the lesser sales figures look optimistic when compared to a forecast for a total U.S. sales growth of 5.1 percent annually for that same period (1997-2002), the print catalog business is slowing down nonetheless.

One reason for this decline may be the Internet. Not only does Web exposure generally cost less, as opposed to the printing and mailing of catalogs one or more times a year, it is also a way to reach phenomenally more people across the world who can access information 24 hours a day, seven days a week. In fact, more and more print catalogs will probably be converting to the Internet in the coming years. "We will all agree that, if we looked through a window to the future at a catalog in 2010, the Internet (or whatever name it might have by this time) would be a standard for operation," says Dr. Mansoor A. Khan of OrderTrust, the leading provider of back-end order and payment processing services, in his August 1998 article The Future of Catalogs. Not only can consumers become better-acquainted with a company and its products through the in-depth, interactive information that a Web site can provide, but companies can also gather marketing research information, including demographics, buying patterns, and product preferences, from the people who visit their sites.

"Companies are finding that the Internet is the most global and yet personalized way to reach customers," says a DMA report, Best Practices in Interactive Marketing. "It connects companies in both business-to-business, and business-to-consumer arenas to vast and diverse markets with targeted, even individualized information. And as more consumers and business customers use the Internet, more marketers regard this channel as a responsive, expeditious way to bring products and services to current and new markets."

The number of people using the Internet is growing by leaps and bounds. In 1996, according to eMarketer, a leading authority of online business information, there were 12.5 million adult active Internet users in America. As of June, 1998, that number had increased to 37 million, and it is expected to grow to 47 million by December, 1998. By 2002, according to International Data Corp., and BusinessWeek magazine, approximately 328 million people around the world will be Internet-connected.

Inevitably, the Internet will become more firmly ingrained in the American lifestyle (the U.S. now accounts for two-thirds of all Internet users worldwide), providing everything from entertainment and information, to instant communication and business opportunities. Someday in the not-too-distant future, it will most likely be an integral part of most American homes, probably combined with our television systems--television cables can carry data up to 1,000 times faster than telephone lines, and the necessary interactive technology is now in the works. Mixed with this medium, the possibilities for exposing products to huge audiences are expanded dimensionally, but it is important to remember that the vast and quickly growing number of Internet users does not translate into an accurate number of Internet customers.

 

Growing Internet Commerce

 

eMarketer provides a more conservative picture by saying that about 65 percent of current Internet users have used the Web to research a product and compare prices prior to purchase, but that only 14 percent of them have actually bought anything online, and an even smaller number have used their credit cards.

"Up to 75 percent of the online community does business by seeing a product (on the Internet) and then calling an '800' number that is displayed on the site," says Mark Richtermeyer, president of iXL, Denver. "They're willing to take that extra step." His company performs multimedia development, online promotions, and strategic consulting for clients in industries such as travel, retail, sports, and entertainment. They have developed some of the most commercially successful sites on the Internet, including one for Alamo Rent-A-Car. "Some people are afraid to put their credit card number online for fear that it will end up on someone else's database," he says. "In reality the risk is infinitesimally small, but security on a site is still important."

Partially because people are wary of financial transactions on the Internet, and partially because Web sites are not organized in such a way as to make multiple-item shopping easy, many consumers use the Internet to research specific products and to compare prices, rather than buy directly. Due to the fact that many sites only offer a certain type of product, traveling from site to site looking for an array of merchandise is almost like going to a separate store for each item on a shopping list, rather than being able to purchase everything needed at a large department store. But even so, the sales numbers are going up.

Global Internet Project says that Internet-based sales in 1996 totaled about $500 million. eMarketer says that about $1.5 billion worth of online consumers goods were sold in 1997, and that this number will increase to about $3.7 billion for 1998. The projections for the future, however, vary wildly, with some total Internet sale estimates for the year 2000 ranging between $6.6 billion and $10 billion, while others companies are forecasting anything from $37.5 billion to $300 billion by 2002. eMarketer says that this inconsistency is due to several factors, including various methodologies, and different definitions of what constitutes "online revenues." "But don't miss the point," they say. "The online consumer revenue market is going to grow dramatically over the next four to five years no matter which source you look at."

In some part, this growth will be due to an increasing number of people steadily becoming more comfortable with the medium, which leads to a positive growth cycle that will continue to include more and more people who are less technologically-oriented. "The exponential increase in online sales is both a cause and an effect of the Internet's expanding technological capabilities," says DMA's Best Practices in Interactive Marketing report. "Technology is evolving to meet business and consumer needs--which increases use and spurs further technological improvement."

In terms of the food industry, online grocery shopping, while limited now, is likely to become a more common practice in the near future. In July, eMarketer predicted that online grocery sales will be $33.6 billion by 2002, a 3,360 percent increase over 1998. They also say that the number of online grocery-shopping households will increase by 77 times over the 90,000 recorded in 1998, to 6.9 million by the end of 2002. Theoretically, this type of shopping will be a part of 15 to 20 percent of U.S. households by 2007, and will account for 2 percent of total U.S. grocery sales (a $400 billion market) by 2000. Who knows? All this technology could even lead to a step back in time when corner grocery stores delivered to your door, and fresh milk was waiting on the front porch early in the morning.

"All indicators suggest the long-term prospects for the industry are very positive," says Jonathan Jackson, an eMarketer analyst. "But we believe ramp-up will be slow due to a number of factors." These concerns include: entrenched consumer shopping patterns, the need for direct interaction with food purchases, and the logistical problems associated with starting an online grocery, such as order handling and fulfillment, the timely handling of fresh foods, and the constant Web site updating of product information.

 

Does Everyone Need a Site?

It seems that everyone these days is wondering about how to cash in on the powerful potential of the Internet, but very few--mostly those who are on the cutting edge of computer technology and/or those who have a lot of money to back them--are raking in the big bucks. There are many more businesspeople out there who want a Web site because they feel they are somehow missing out, or fear they will be left behind if they don't have one. According to American Demographics magazine, February 1998, 10 percent (Dun & Bradstreet says it's as high as 35 percent) of small businesses consisting of one hundred employees or less now have a Web site, with an additional fifteen percent expecting to establish one sometime during the next year. The article also points out that the small businesses who have Web sites or other Internet connections saw 10 percent annual growth in the past three years, while those without that link grew 7 percent during the same period.

But in order to justify the time and expense of a Web site, proprietors need to pinpoint carefully the purpose for their proposed Web site's existence, as well as determine its place in their overall business strategy. "The problem is, most food and beverage companies haven't a clue on how to transform the Internet into a selling machine," says Bob Messenger, editor of Food Trends Newsletter. "I say it can be, but it requires a serious commitment to actually 'see' the Internet as a marketplace, and then to develop products specifically for Internet consumption. Until marketers do that, the Internet will continue laying glaze over the eyes of CEOs, presidents and senior VPs everywhere in the Top 100."

Mary Going, president of FireGirl, a Web site development and design company that specializes in promoting Fiery Foods products, believes that a Web site should not be viewed as a "miracle drug," but rather as a facet of an all-encompassing marketing plan which also includes print advertising, press releases, possibly brochures and/or other media exposure (remember to include a plug for your Web site and its address on all of your print materials so potential customers know where to find you), in addition to buying banner advertising on well-targeted Web sites, and negotiating for links on other sites in order to draw more traffic to your site.

She says that retailers who carry a large selection of products are more likely to sell enough merchandise online to make their Web sites worthwhile, than is a manufacturer with a small number of products. "You should not think of the Web as a place to sell by the bottle," she says. "Visitors won't bother to pull out their credit cards to order just one or two products--they want more variety." For smaller manufacturers, she says, a Web site should be a showcase to give consumers an idea of what the company and the product are really all about. "Once people get to your site, make sure they see what you want them to see--a sort of visual taste of your product," she says. For instance, if you are marketing to an upscale clientele, you will want a fancy label and a fancy-looking Web site. If your product has more of a country theme, you will want your site to reflect that image.

"If I were to create a product right now," she says, "I'd use the Web as a tool and put all my energy into making it interactive (contests, drawings for prizes, comment boards, chat rooms, etc.). I'd then use other tools like print ads, e-mail, banner advertising, and mailing lists that I would buy." Going says that her own FireGirl Web site, which has been running since 1995 and is dedicated to the business and the culture of Fiery Foods, receives about 8,000 hits per day. A "hit" is defined as the number of times any file on the Web site is requested, which includes individual pages and graphic files as well. For instance, when someone downloads a single page that has three graphic files on it, it counts as four hits.

 

The Elements of Success

Most experts agree that the key to a thriving site lies not only in attracting people to it in the first place, but also in enticing them to come back. A recent survey conducted by the Intermarket Group said that for high-end Internet sites (having an average customer base of 713,000 registered users), that conduct business, 53 percent of the total online revenues come from repeat customers, which is up 37 percent from 1997. This premise holds true for the smaller sites as well.

"Your best marketing money is spent on repeat clients," says Mark Richtermeyer, president of iXL, Denver. "You need to come up with programs and services for existing customers, and offer added value for doing business that way." In order to accomplish this, he recommends incentives such as redeemable "points" in exchange for purchases made online, and an e-mail list that people can sign up for, which provides them with news and product information, (and in return provides the business direct contact with its customers). It is also important to employ a secure, simple-to-use system for ordering products online--some programs will immediately send the order to a fulfillment house and route the credit card information to the bank where the purchase amount is quickly debited.

It is also essential, says Richtermeyer, to hire a respectable Web development company who will help you avoid pitfalls, and will provide both the expertise to make sure that your Web site functions well and the creative talent not only to market your site, but also to make it look good on a consistent basis. "You want to maximize the buy-to-browse ratio so that most of the people who come to your site are there to purchase," he says. According to several sources, set-up costs can range anywhere between $500 to $25,000 and up, while maintenance, including hosting (providing a place for your site to live), updates, and redesigns, can cost $400 to $2,000 and up per month. Many Web site-owning companies build these expenses into their marketing budgets.

Following are some of the essential elements that Richtermeyer says every Web site should have in order to be effective:

Good navigation--information that flows easily so people can quickly find what they want.

Fast response time--images that download quickly. This is both a function of design and of the host.

Search Engine Optimization--wording engineered in such a way that most search engines will recognize your site.

An attractive presentation.

Accurate, updated information.

Copy that reads professionally.

A call to action--make it obvious what you're selling, make it look desirable, and make it easy for people to buy.

Transaction capability--the ability to accept credit cards in a simple and secure manner. "Security measures add a level of confidence to the shopper," says Richtermeyer. There are several available software packages for this purpose. Encryption (scrambling credit card numbers as they travel through cyberspace) is a service and generally entails an additional monthly cost.

 

Site Profiles

While there are definitely some basics required to get a strong Web site off and running, the specifics are as individual as the companies themselves. According to the Wall Street Journal, there are more than 100,000 retailers on the Internet right now, and ActivMedia says that about 30 percent of them are making money. Following are some short profiles of companies, small to large, who are in that percentage, but are achieving success in various ways.

 

A Small Business Site

Keeping it fresh is a challenge, both in the produce business and in the Web site business, and Paul Momand, proprietor of Farmers Pick in Boise, Idaho, has found a way to do both equally well.

Having been in the produce business most of his life, Momand has specialized in garlic and whole dry chile pods and products, including braids and ristras since 1990. Five years later, even though he was always able to keep busy selling and fulfilling traditional orders, largely in Northwest markets, he decided to expand his horizons by starting a Farmers Pick website. "I just think it's going to be the wave of the future," he says.

Momand sells only retail from the Web site, and gears it toward consumers, rather than industry people. "I like knowing who I deal with for wholesale--it's the majority of my business, and I like to stay in touch with those people," he says. "Also, I don't want to broadcast my wholesale prices." This decision has not slowed commerce on the site, however, as sales from this source alone comprise about 25 percent of his total business.

The trick, he says lies largely in giving people a reason to come back. Momand says that 60 to 75 percent of his online business is generated by repeat customers, and that he keeps them interested by providing frequently updated recipes, a forum for comments, and drawings for prizes, recipes, and links. Between August and September, his "Funstuff" page was most often visited on the site, having been downloaded 2960 times. "You have to give people more than just the product to bring them back," he says. "There are some people who have entered my drawings every month for two years." He also tries to introduce at least one or two new interesting products every year.

Momand says that he started out with a large budget and hired a Web company to design and maintain his site, and sales made up for the financial outlay within a year. Now he keeps costs low by maintaining the site himself, updating once a month, which takes more than twelve hours each time; answering e-mail, spending anywhere from fifteen minutes to one hour each day; and cultivating links, which he says he chooses very carefully. Since the site continues to "pay its way," Momand does not feel the need to include a lot of technological gizmos-- in fact, he thinks his site is successful for much more basic reasons: the availability of top-quality products that are difficult to find in some parts of the country, in addition to prompt, personal service. "I've had people say that they prefer a simpler look (on the site)," he says. "I don't have to look real slick."

 

A Bigger Business Site

As one of the oldest retail sites on the Web, the HotHotHot site now generates $10,000 a month in sales, which has almost doubled the 1997 figures of $5,000 to 6,000 a month, says Ben Aurora, a marketing executive for the company.

The Web site was started in 1994 by Monica and Perry Lopez, who were the first entrepreneurs to offer a vast array of hot and spicy products for sale over the Internet. Over the years, the site has won design awards, and has been recognized for its innovation. In 1997, they sold HotHotHot to the Arora family, who are also involved in the manufacturing and marketing of the Tombstone, Arizona line of sauces and salsas.

Arora says that every day the site receives 9,000 hits from fifty-six countries, and that it generates eight or nine orders. Plans for future growth include a recently-launched line of HotHotHot brand products, discount coupons, and the Hot Partner program whereby accepted Web sites can receive 5 percent of sales generated by clicks coming from their sites. In addition, Arora says, they are beginning to diversify into a wider range of products to offer more than just hot stuff, and they are also reducing prices to attract a larger audience.

 

A Large Business Site

 Wild Oats Community Markets, based in Boulder, Colorado, is the fastest growing and largest chain of natural food stores in the U.S., and now it is using an updated Web site concept to test new markets and products, as well as to increase its exposure. In September, the company launched their revamped Web site to facilitate the retail sales of natural foods, herbs, and vitamins and nutritional supplements. Their old site, started in 1996, offered communication, but no commerce.

This ambitious venture, however, is by no means a sure thing. In an interview published in the September 1998 issue of Gourmet News, Jay Robinson, the director of electronic marketing at Wild Oats, who worked on the site for about a year and a half prior to its debut, says that he has learned from the failures of other companies and is planning very carefully. "Specifically, it's a risky business and most of the models have fallen on their faces losing money," he says. "You have to know the customer really well."

In addition to introducing new products, sales will focus on natural vitamins and supplements--"It's a great pre-niched audience," says Robinson--as well as cereal, and Wild Oats' private label products. The company estimates that the average shopper will purchase about $20 worth of merchandise every visit.

To help make purchasing as seamless as possible, the site offers an inventory management system so that customers will not be able to order an item that is out of stock; and billing, which is calculated by the weight, not the price of a product, will occur only for items that are actually sent. As it stands right now, all fulfillment will be out of a warehouse in Irvine, California, but if it turns out that there is a heavy demand on the East Coast, says Robinson, Wild Oats will ship from a warehouse in Princeton, New Jersey. "We're trying to eliminate inefficiencies," he says, referring to issues such as warehousing, order picking, and fulfillment, the details of which have caused other similar ventures to fail.

One possible off-shoot of the Web site is the beginning of a home delivery service, which would further expand the realm of Wild Oats. "With the time constrained people in Boulder, it works pretty well," says Robinson. "Now the time has come to test the rest of the country."

 

The Future

Actually, the entire Internet is in a testing phase right now, as media companies vie for control of lucrative "portal," or search engine, sites such as Yahoo!, Lycos, and Snap!, content runs rampant and unregulated, and online business learn through trial and error how to sink or swim. But maybe the key to success is not as much about high technology and futuristic gadgets, as it is about good basic business practice. Consider a study cited in Nation Bank's TrendWatch newsletter that says only 2 percent of the current $21.8 billion in sales off the Internet are the result of (banner) ad sales. The other 98 percent comes from the online sales of goods and services. Basically, this means that the secret lies not in the dazzle that technology can provide, but rather in the convenience it can deliver.

Which leads to the one thing that holds true throughout: customer service. Successful businesses of the future, Internet-based or otherwise, will be the ones that offer ways of making people's lives easier with products and services that are easy to identify, simple and safe to purchase, and are delivered in a timely manner. Sound familiar?

One company that is beginning to cash in on this premise is CyberChefs, based in Miami, Florida, which now has a growing business based on people's desire for convenience. They help provide in-home or in-office delivery of restaurant food by hooking up with restaurant and delivery services. Customers can then access the menus of participating restaurants through the CyberChefs site and place an order online. This not only enables people to customize their meals with special cooking instructions or extra condiments, but it also allows them to schedule delivery whenever they want. For instance, someone can send an order from the office and specify that it be delivered to their home in time for dinner. Right now participating cities include Boston, Minneapolis/St. Paul, Orange County, California, and Philadelphia, as well as Miami and parts of south Florida, and they hope to add about six new cities before the middle of 1999. Launched in Miami in November of 1997, CyberChefs has gone from handling a couple of orders a week, to processing a few hundred a month, says Steve Teitlebaum, one of the owners.

While there are some researchers who argue that anyone without a Web presence will not be able to maintain a business throughout the next century, there are others who believe viability has to do with more basic things, like paying attention to the details.

Dr. Mansoor A. Khan, in his article, The Future of Catalogs, emphasizes that a flawless delivery medium is most important to businesses of all types. "Effective customer service in the future will require the smooth processing of orders. Catalogers will need...the means to manage every order placed through any inlet (phone, Web, intranet, etc.,) to track the orders through their life cycles, and to provide their customers with levels of customer service even better than what we would be able to offer at the retail store level."

 

Sources:

 

Direct Marketing Association

1120 Avenue of the Americas

New York, NY 10036-6700

PH: (212) 768-7277; FAX: (212) 302-6714

 

eMarketer

Geoffrey Ramsey, Statsmaster

821 Broadway

New York, NY 10003

PH: (212) 677-7137; FAX: (212) 777-1172

 

Farmers Pick

Paul Momand

10400 Overland Rd., #393

Boise, ID 83709

PH: (208) 333-0066

 

HotHotHot

Ben Arora

305 N. Beacon St.

San Pedro, CA 90731

PH: (800) 959-7742

 

iXL, Denver

Mark Richtermeyer

12600 W. Cedar Dr.

Lakewood, CO 80228

(888) 495-88005

 

Profile of the Average Internet Buyer

General:

• Average Age: 33
• Female: 35%
• Male: 65%
• Average income: $59,000

Total Respondents to Survey:

• USA: 74%
• Europe: 11%
• Canada: 9%

Internet Usage:

• 78% of respondents use their Web browsers more than once a day
• 38% use it more frequently than 4 times a day
• 40% use the Web 1 to 4 times a day
• 19% use it less frequently than once a day

Many people shop online, but don't buy because they are concerned about security issues:

• 33% have bought multiple products online
• 46% have never bought anything online
• 7% never access product information on the Internet
• 53% of Netters between ages 19 to 25 have never bought online

What do users access on the Net?

• 48% reported they have never accessed a newsgroup or have only accessed them a few times
• 14% use newsgroups several times a week
• Older respondents tend to access newsgroups more frequently than younger, 23% access them at least once a day
  

Primary use of Web browser (most people checked off multiple categories):

• 79% browsing
• 65% entertainment
• 51% work/research

How do the Netters find out about your Web page?:

• 91% find out about Web pages from links on other Web pages
• 83% from popular search engines
• 64% from popular magazines
• 59% from friends
• 44% from newsgroups
• 40% from newspapers

Web browser bookmarks; how likely are they to "bookmark" you?:

• 77% have between 11 to 50 bookmarks
• 19% have over 100 items listed

Marital status:

• 41% married
• 41% single
• 10% living with someone
• 5% divorced

Occupation:

• 30% educational
• 28% computer related
• 19% professional and management career

General Info:

• Over 50% of users access the Internet from home and pay for it themselves (as opposed to work)
• 57% have one or more college degrees
• 88% use English as their first language
• 87% are Caucasian

This survey has been reprinted with permission, and was compiled by the Internet Marketing Center, a business that provides information on starting and promoting online businesses.

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