InformationWeek: The Business Value of Technology

March 12, 2001

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Slow But Steady

Caution isn't cool--but it's a strategy that has paid off for a number of online businesses

By Eric Chabrow   (echabrow@cmp.com)

More on E-businesses:

sidebar:What The Rest Of Us Can Learn From eBay E-Business: Delta's Ticket To Sales (2/26/01) E-Business Integration Doesn't Come Easily (2/12/01) The End Of Internet Time (1/22/01)

uccess hasn't made Southwest Airlines Co. any less cautious about E-business. With $1.7 billion--30% of last year's sales--coming from its Web site, where the costs are as much as 90% less than using a phone representative or travel agent, the budget airline has put together a profitable Internet business by any measure.

Yet Southwest continues to tread warily toward its online future. Only in recent months has it started offering car rentals on its Web site, using preferred partners Alamo, Budget, and Hertz. Hotel reservations with partners including Hilton, Hyatt, and Marriott will have to wait for the results from car rentals. "We're not diving in headfirst, but taking baby steps to ensure that it'll work," says Melanie Stillings, the airline's market automation manager.

Caution wasn't exactly the watchword of the Internet boom, which rewarded grand ambition over careful planning. Nevertheless, using a deliberate and sometimes patently risk-averse approach to executing their business plans, a small but growing number of companies are beginning to turn a profit selling goods and services on the Web. These successful online businesses follow a formula that combines two main ingredients: Keep the offerings simple, and stick to your area of expertise. In addition, successful online ventures born of traditional companies closely align their real and virtual offerings, often weaving Web efforts into legacy systems and staff.

As the economy slows and the Internet hype cools, spending on online ventures will face even greater scrutiny. These companies' cautious approaches--guided by measurable financial goals along the way--may be the best chance for moving such initiatives forward.

Such an approach has allowed floral retailer FTD.com to become profitable while expanding into new products, Recreational Equipment Inc. to use the Web as its testing ground before adding products to its outdoor gear and clothing stores, and Carolina Power & Light to create an application service provider subsidiary that attracted major accounts such as Sears, Roebuck & Co.

Another common thread among these companies is that they held their online efforts to the same kind of business measurements that any other new venture would face. "There's no new formula to separate the wheat from the chaff," says former PepsiCo Inc. CIO Steve Schuckenbrock, now a managing partner of the Feld Group, a technology and management-services firm. "E-business success is pretty well rooted in the formula of brick-and-mortar businesses by extending their capabilities through the Internet."

Consistent Culture

Simplicity and low costs are at the heart of Southwest's culture, and the airline didn't lose sight of that as it moved online. Reservations flow through the same IT systems whether they're made online, from a call-center agent, or through an independent travel agency.

Southwest's 40-plus marketing automation employees who develop, maintain, and promote the company's Web site work side-by-side with other staffers in the company's marketing department. "Every business decision made is an integrated one," Stillings says. "Anything we do offline is mirrored online. There's a definite cohesiveness."

That kind of integrated approach helps Southwest drive efficiency, which, in turn, drives profitability. "You're dealing with one culture," says Tony Treccapelli, U.S. co-leader of Internet services at consulting firm Arthur Andersen. "If a customer has to deal with a different culture on the Internet than with customer service, you could have a problem."

Passengers navigating their way through Southwest's Web site needn't log on or submit passwords to purchase tickets. With only five clicks, a passenger can book a ticket online, even an hour before departure.

The ease of buying tickets online fits the unadorned mien of the feisty, low-fare carrier, a profitable business for 28 straight years, even though the average one-way fare last year was only $85. Southwest's fleet of 346 jets consists only of Boeing 737s, minimizing maintenance and training costs. Eight of 10 passengers use electronic tickets for flights that offer a single class and no meals.

Southwest operates its own reservation system, limiting the commissions paid to other travel services. It costs Southwest $1 to book a flight online vs. about $5 through its telephone reservation centers and $10 via a travel agency, helping make the airline the most efficient among its competitors.

Southwest's net profit margin last year was 10.7%, the highest among its principal rivals. Margins among its competitors' ranged from a decent 8.2% for Delta Air Lines to a feeble 0.3% for United Airlines. "We don't put roadblocks in the way of the customer," Stillings says. "We're successful because of our simplicity."

Holding High-Tech To High Standards

A company can take a cautious Web strategy and still be an innovator. Clothing retailer Lands' End Inc. launched its first Web site in 1995--originally intended as an extension of the customer-service department--and it has been a leader in developing interactive Web technology. In the fall of 1998, a virtual model was added for women shoppers to "try on" clothes--men didn't get a similar offering until two years later. In 1999, it was one of the first sites to offer online chat sessions with company sales representatives.

Where Lands' End was more cautious than many online retailers was in customer acquisition costs. E-commerce marketing manager Terry Nelson says the company knows from its long retail history what a customer is worth and expected the online business to spend no more than other sales channels to acquire them. That led Lands' End to walk away from advertising deals with top portals such as Yahoo and the Microsoft Network, where the costs were deemed too high.

"Early on, that raised a lot of eyebrows," Nelson says. "Because of our offline experience, we knew the metrics that led to success, and those metrics were the same online as they were offline." Landsend.com accounted for 16% of company sales last year, up from 10% in 1999 and 4.5% in 1998. Three of 10 online customers are new to Lands' End, and 20% have never received the company's catalog.

An Online Testing Ground

Recreational Equipment, another retailer, is using the Web to lower its risks for new product launches in its brick-and-mortar stores. Like Southwest's Web site, Recreational Equipment's site is linked to a single back-end system that also supports its catalog operation and 60 retail stores. Though the company's 5-year-old Web effort can't replicate its Seattle flagship store, where climbers can try out rock shoes by scaling a 65-foot pinnacle in the lobby and mountain bikers can test bikes on an obstacle-crammed, 580-foot trail, the site tries to capture the spirit by offering message boards and how-to articles about products.

Recently, Recreational Equipment began using its Web site as a lower-cost way to test new offerings without giving up retail floor space. In late 1999, the Kent, Wash., retail cooperative--the business is owned by its 5 million customers--began selling fitness and fly-fishing gear online, merchandise unavailable in its retail outlets. In recent months, Recreational Equipment added fitness clothing and electronics such as heart-rate monitors in all 60 stores, in-line skates in eight outlets, and exercise bikes and equipment in three stores. Next month, the retailer will double to four the number of stores selling fishing gear.

The leap from Web to store is shortened by the fact that many of the retailer's customers shop multiple channels--45% of REI.com buyers also made store, phone, or catalog purchases in 1999, the last year it analyzed sales figures by channel. And the online channel is growing. Traffic on the company's Web site rose 31% last year, and it converts 4.4% of visitors to buyers--which Joan Broughton, VP of direct sales, compares with an industry standard of 2% to 3% that's considered good. The bottom line: Online sales soared 122% last year to $92.1 million, which represents 13% of Recreational Equipment's $698.3 million in total sales. In 1999, online sales accounted for only 6% of all company revenue. Broughton says REI.com posted a profit in 1998 and 1999, lost money in 2000 because of investments to relaunch its Japanese Web site and improve infrastructure and fulfillment in the United States, and predicts profits to return this year. "It paid off at Christmastime," Broughton says of the investment. "We were able to get people's orders out the same day."

Illustration by Calef Brown
Photo of Soenen by Jennifer Dickson
Photo of Lange by Black/Toby

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