Net Profits

By now, you've surely heard the hype. The Internet is the technological wonder that will change the way America does business. Boosters preach the gospel that the Net, and particularly that portion of it called the World Wide Web, will bring business into the living rooms of consumers all over the world, opening unprecedented marketing opportunities to savvy capitalists. Soon everyone from Hong Kong to Hoboken will be shopping in this Virtual mega-mall--and they will do it 24-hours a day, seven-days a week.

But if you build it, will they come? An increasing chorus of critics contend that the profit potential of the Net is sheer cyber fantasy: people are not shopping on-line in droves because the technology remains too complex and the data transmission is painfully slow.

"The media has turned 180 degrees," states Dr. Jill H. Ellsworth, a Senior Partner at Oak Ridge Research and author of The Internet Business Book. "For a long time, it was: 'this is the greatest thing since sliced bread.' Now it's 'no one is making any money'. Both stances are wrong." Ellsworth says that a survey she conducted in 1995 shows that, of 462 businesses queried, over 80% were making money. Dr. Ellsworth's survey broke down corporate profitability by size. "Businesses in the 1-10 employee range were making profits in the $0-25,000 range, while large businesses were making in the $100,000 range," she says.

Commerce is, without a doubt, the single most rapidly growing sector of the Net. In just 6 months in 1995, the number of commercial Web sites tripled, rising from 4,500 in May to 15,000 by November. During the week of October 23d to 30th, 1995, 381 new business sites were established. According to ActivMedia, Inc., a research group which compiles comprehensive surveys on Web business, commerce grew by 50% per month in the Summer of 1995, and showed an annualized growth rate of 1800%. This rate is expected to drop off significantly, dipping to 860% in 1996 and 400% in 1997.

Small to mid-size companies have thus far been the profit leaders. Average sales ranged between $10- and $60- thousand per month in the final quarter of 1995, with the top 2% of marketers earning $100 thousand or more and accounting for 50% of all sales.

Controversy over the Net's potential is exacerbated by the fact that the information highway is still under construction. One of the most frustrating features of the Web is the slowness of its data transmission. The technology has not kept pace with demand, and browsers are forced to wait long minutes both to navigate and view home pages.

Even the actual size of the Internet's population remains debatable. Though hundreds of researchers are feverishly gathering data, none can guarantee the reliability of their results because user-tracking software remains inadequate. Population estimates veer from 5 million to 50 million. Ironically, despite a lack of consensus on how many of us are there today, there is a consensus estimate of how many will be there tomorrow: 100 million by 1998.

The most authoritative source on current Net population is a Nielson survey completed in October 1995 which claimed that over 24 million people are currently on the Net. Cynics, however, note that because it is impossible at present to distinguish repeat visits (or "hits") from new visits, these numbers are vastly inflated. They cite survey data which show that only a fraction of those who have email addresses at work or school venture beyond their electronic mailboxes.

The Nielson poll notes that 2.5 million people have already made purchases on the Web. This confirms an April 1995 survey by Georgia Tech, which shows that only 10.5% of users go on-line to shop. Most people (83%) prefer merely to go web-browsing--the on-line equivalent of window shopping.

"It's very questionable that people will ever feel comfortable buying this way. Why would someone buy a pair of shoes on the World Wide Web when they can walk down to the corner store and try them on? And I say this from the perspective of an old-time computer geek," says Dave Browde, technology reporter and host of Dave's Datafile on WNBC/New York.

Confusion over on-line markets is another source of frustration for Net commerce. Contrary to popular belief, women are not more likely to shop on-line than men. Predictably, men,who constitute roughly 80% of the on-line population, are the target market for the abundance of computer-related companies on- line--like Digital Equipment Corporation, which sold $140 million of hardware through its Web-site in 1994. Yet even small retailers are getting more orders from men.

"Women are more cautious. From studying our logs, we know that a woman is more likely to check back to a particular product 5 to 10 times before making the decision to order. Men usually look at it once, grab their credit card and order!" reports Liz Evangelatos, Owner, Mediterranean Marketplace, which specializes in Greek imports.

Still, while the data changes radically week to week, and media opinion swings from one extreme to another, one thing is certain: commerce is rushing to get on-line and, more important, the Net is growing. Growing very, very fast.

THE WORLD WIDE WEB

The Net comprises so many competitive services that it is impossible to predict which one will win. But, in the race for consumer dollars, the Web is clearly in the lead. Activmedia reports that the Web generated $436 million in sales in 1995, and projects that sales will rise to $46 billion by 1998.

The Web is a discrete component of the Net which permits access to millions of sites (or "home pages")by means of simple, point and click technology. Browsing software (such as Netscape and Mosaic) and search engines (such as Lycos, Yahoo, and WebCrawler) have made the Web uniquely user-friendly. This unregulated, unlimited-space, public-access environment is like an open-air bazaar in Marrakesh. Where else but on the Web could one find genteel giants such as AT&T and Coca-Cola elbow-to-elbow with The Amsterdam Sex Club?

The reason: setting up a home page on the Web can be done on the cheap. Assuming the would-be Web-wiz has the proper hardware, she only need rent storage space from an Internet provider (monthly fees range from $35-$200 plus, depending on level of service) and install a site. Shareware (free or low- cost software) and how-to books permit novices to build their own sites free of charge.

Most entrepreneurs, however, hire consultants to create,publicize, and maintain their sites for them. Bring in the specialists and the cost scenario falls apart. Expenses range anywhere from $500 dollars for a bare-bones site to hundreds of thousands of dollars for sophisticated multi-media environments. For example, New Media Departments are springing up at corporations nation-wide, staffed by high-priced specialists and equipped with state-of-the-art technology.

While Activmedia's surveys show that total expenditures for sites in 1995 ran $131.4 million, or one quarter of total Web sales, some industry-watchers are skeptical about corporations' eagerness to invest heavily in something so speculative.

Mark Stahlman, President, New Media Associates, and one of the nation's leading technology futurists sees it this way: "One has to have a presence on the Web because there's so much momentum around it being 'the next big thing' in technology. The original next big thing was CDRom. CDRom has lost more money than it's earned. Then came interactive television; now that's cratered. The Web is the hype that came next. So it's mandatory, whether it's profitable or not, that you participate."

Major corporations are indeed reluctant to reveal the bottom- line of doing business on-line. "When you ask big business if they're making money, no one will give you hard numbers. They're a little embarrassed that they've sunk huge chunks of change into it and haven't seen anything coming back," says Browde.

Small entrepreneurs who have made a low capital investment in their sites are, however, eager to report their results. They exult in their new-found ability to penetrate global markets and to track site usage. Search engines allow browsers around the world to quickly locate businesses by product line; and site software enables entrepreneurs to count the number of visits (or"hits") they receive each day.

Say Charles Jones, author of The Internet Marketing Report, "I have been astounded by the amount of traffic that my Auto Dealership Web site has gotten. It receives thousands of visits each day and overseas clients constantly ask me to help them source cars and trucks. Never in my wildest dreams did I think an auto-dealership in Southern California would get so much interest from global customers."

Ursula Kuehn, who owns She Sails, Inc., a retail company which targets women sailors, is amazed by her success. "When I first put the catalogue online, I was told that there are very few people, much less women, on the InterNet." Kuehn spent $3000 to get her print catalogue on-line and pays a webmaster $300 monthly to update her site. Her site became even more profitable once she began advertising its existence on-line.

"It took a little over three months to get the return on my investment and that was from people who just happened across my Web page. I get about 200 visits per week. The response in dollars is roughly two orders of at least $100 each per week. It is the same 1-2% response expected from a catalog mailing." She notes, "That I can get orders on a continual basis without advertising is a positive indicator of the potential of the Web for my company."

COMMERCIAL SERVICES

If the Web is an exotic bazaar, CIS, America On- Line, Prodigy, and other commercial services are the suburban malls of cyberspace. They lease secure, centrally-monitored space within their own neatly-organized structures. The proprietary software on these services are technically hack- proof and vendors undergo rigorous scrutiny.

"One of the big advantages of the commercial services is that merchants are screened," say Sarah and Herb Heller, owners of a chain of virtual gourmet shops. "These aren't fly-by-night companies. Consumers also know that they are shopping in a secure environment: they don't have to worry about credit cards being compromised." Still, the Hellers admit, "If we were starting today, we would look very seriously at the Web," because of the costs of commercial Nets.

To do business on Compuserve, the second-largest commercial service, with over 4 million members worldwide, merchants must negotiate terms with CIS headquarters in Columbus, Ohio. According to Keith Arnold, Manager of Interactive Marketing, CIS charges merchants a base rate of $50 thousand a year plus 2% of sales for a complete turn-key package in CIS' Electronic Mall (GO MALL). Mall merchants are also urged to buy ads in CIS publications, for which they receive credit allowances. "We will only work with companies which have the financial and staff resources to profitably participate in the Mall," says Arnold, who notes that the Mall has an annual turnover rate of only 15% to 20%.

For moderately-capitalized, small entrepreneurs, the costs add up. To open their first virtual store on Prodigy (JUMP Cheeseboard), the Hellers say, they made an initial capital investment of $25,000 in 1989 ($10,000 for licensing and $15,000 for inventory, equipment, and other start-up costs). In 1992, they opened Adventures in Food on Compuserve, and, in 1995, a la Modem on the now-defunct eWorld. Their Hampton, N.H.-based business currently derives 90% of its revenues from on-line sales, and they are only now beginning to break even.

"It's been a large capital investment in getting business to grow," the Hellers admit. Still, the couple strongly believes that the profit potential is rapidly expanding: "We've seen continual double-digit growth every year. We consider this an investment in the future."

The hottest success stories on the commercial nets are told by small, home-based business owners who have mastered the fine art of on-line networking. While direct sales and advertising are forbidden in discussion groups on the commercial services, some savvy entrepreneurs discreetly use the groups to build relationships with potential customers.

Katie LaChance, a court reporter and co-founder of Legal Services Institute, Inc., was active in CIS Forums where people in her field congregated. She soon met partner Maureen Robinson and discovered they were both experts in scoping, a highly specialized court-reporting skill. The women wondered if others would be interested in training in this skill, and began to post messages which subtly trolled for potential customers. The response awed them.

"For a start-up company to reach the sales we have so far this year, at a 50% net profit before taxes, I'd definitely say this has paid off," says LaChance. "In our eight months in business, we have gone from $0 to over $100,000 in sales. We expect to more than double that next year." LaChance notes that this has been accomplished without either a Web-site or advertising. Their business is built on the personal relationships they cultivate in discussion groups. LaChance's actual cost of doing business on-line: $50 per month for subscription fees to commercial services.

SELLING DIRECT

On the Web, entrepreneurs are learning that there is much more to selling than merely creating a site. While commercial services heavily promote their retail vendors, getting noticed on the Web--where roughly 30,000 businesses will be in operation this year--is tricky. Large corporations may rely on customers to seek them out, but small businesses quickly vanish into the ether for lack of visitors.

"We first opened our 'cyberdoors' in April 1995," says Evangelatos, "You can't imagine our dismay when we only had 30 to 40 hits a day! We now average 500-700 hits a day, but we've had as many as 1800." L.L. Bean, on the other hand, got 240,000 hits per day only a month after their site went into full swing.

One way to create visibility on the Web is to widely disseminate a site's electronic address. There are innumerable resources on the Net for entrepreneurs to list their address free of charge. Search engines encourage site owners to register their addresses and list keywords. Potential customers who type in the key-word will then see a list of sites, and can navigate directly from Webcrawler. For example, typing "florists" into Webcrawler generates a list of hundreds of sites in hypertext: point and click at the desired site, and Webcrawler jumps you to the page you selected.

Media cross-promotion is indispensable. When Kodak's Digital Applied Imaging division ran print ads in The Wall Street Journal listing their Web site, traffic soared. "We can track spikes on the Web related to those ads," says Mike Pagano, a strategist in Kodak's brand-new Internet Marketing Department.

Another valuable approach is to set up and swap "links" (or "hotlinks"). Links appear as hypertext within a document, and function as electronic doors: users click on the highlighted word and automatically move to the linked site. Web entrepreneurs work cooperatively by swapping links: this way, visitors to one site may navigate effortlessly to another.

Just as failure to promote a site adequately spells doom for Web merchants, so does lack of a coherent marketing strategy. "My greatest frustration is with individuals who are trying to get rich quick on the Net," complains Charles Jones, "This medium only helps make the connection between the potential customer and the merchant. You still have to sell!"

Understanding your niche and your market's needs and demographics are critical to Web viability. Ursula Kuehn credits the success of She Sails to three main factors: she has a unique market niche; her customers tend to be computer-literate professionals who find on-line shopping to be time-efficient; and She Sails' on-line catalogue features photos of average-looking women, not glamorous models, which her customers appreciate.

The Hellers believe that refreshing their product offerings keeps customers coming back. "We want people to have an experience with food and the ease with which we can change our offerings on-line helps." They rotate the merchandise monthly in their three shops and run seasonal and holidays specials. So far, Prodigy has been their most successful venue. "We have long-time customers on Prodigy who buy from us 10 times a year,and who have spent several thousands of dollars. That's a lot of food!"

The biggest challenge facing Web merchants is that the technology has not yet been invented to guarantee secure financial transactions. Technology specialists are working frantically to perfect hack-proof software but many corporations still shy away from direct sales for fear of hackers breaking into their billing system.

L.L. Bean provides a high quality,graphics-enhanced catalogue at its site, but customers must dial the firm's 800 number to place orders. "We will be offering our customers secure on-line transactions sometime in 1996," predicts Dale Moore, Director of New Media Technologies for the company,"But not until we're convinced that the information is secure."

Delivering an efficient and secure on-line ordering system is also a chief priority for Kodak. Within months of its launch, their site, which offers an impressive array of product information, was receiving 200,000 hits per day. Kodak very quickly realized that, without an on-site ordering system, millions of dollars in potential sales were being lost. "We hope to make inroads into commerce: that is a key goal for 1996," says Pagano, who also notes that Kodak's greatest in-house challenge is to develop a corporate infrastructure to support billing via the Net.

EARNING SOFT DOLLARS

The biggest bucks "earned" on the Net are "soft dollars"--for example, cost savings instead of hard profits. In some instances the Web allows a company to employ money-saving techniques, such as the on-line package tracking serviced offered to Federal Express customers, which reduces the company's overhead and paper costs. But far more potentially lucrative is the two-way information flow between business and consumer, a vast improvement on the one-way delivery of advertising messages to consumer.

When browsers visit Toyota, they are greeted by attractive graphics, lively copy, and fun facts on contemporary culture--and no explicit ads. At first glance, Toyota seems to be giving far more than it is getting. The pay-off however is the information that browsers supply. Toyota cheerfully exhorts users to "tell us who you are and what you like." In exchange for completing survey forms about themselves and their product preferences,visitors get free CDRoms, brochures, and mailings with news about Toyota's site. Toyota, meanwhile, collects data on consumers.

According to Jim Pitkow, Principal Investigator for Georgia Tech's survey of the Internet, "The big game now is household penetration. Just as technology once enabled mass production, it is now enabling customization." By gathering detailed information on consumers' personal habits and shopping preferences, corporations are exploiting unique opportunities which the new media afford.

"We are seeing a shift in market research from demographics to psychographics," says Stahlman, "Madison Avenue wants to build individual dossiers so they can direct advertising to our individual whims."

Surveys are not the only ways in which corporations are gathering data. On sophisticated sites, specialized background software covertly tracks visitors: it "sees" how much time they spend in the site and how they spend that time. Some sites even peek into their visitors' pocketbooks by soliciting information on their personal finances.

Toronto Dominion Bank has received industry praise for its innovative on-line presence. TD offers excellent give-aways to visitors: free news summaries for executives, free software to small business people, and free financial advice to consumers. Among TD's many freebies are personal portfolio planners and on-line assessments of mortgage risk. Visitors complete questionnaires about their finances, and the site issues an analysis of their financial risk and recommends asset allocation.

Sounds good for the consumer--and it is. But it may be even better for the bank. It is widely acknowledged that all such consumer data are being stored and analyzed. And, while companies gravely insist that they would never misuse the information, they certainly have the power to do so.

Whatever the ultimate disposition of these data their value in helping executives develop marketing strategy is already immeasurable. Further, software tracking of consumer habits is infinitely cheaper and far more reliable than conventional market research.

While major businesses are earning soft dollars by collecting data, small business are earning them simply by saving money. "In some ways, the small business owner has more potential than a large corporation," says Evangelatos. She notes that typical office expenses, such as rent, office furniture, and supplies, are non-existent. "You can have a site on the Internet and use your home as your headquarters, so there is almost no overhead."

Even catalogue giant, L.L. Bean, which intends to continue publishing print catalogues, is excited about the possibility of reaching millions of new consumers without the costs associated with land mail. "The Web gives us an extremely cost-effective way to disseminate information," says Moore. An added plus for the environmentally-conscious: virtual paper is green. There is no waste of trees, chemicals, or paper.

Web sites also provide email addresses. Customer queries,promotional mailings, and purchase confirmations may be conducted through free electronic mail--without postage or stationery. Email communication drastically reduces the number of man-hours most businesses devote to landmail-processing. Email also moves as quickly as a FAX, but at a fraction of the cost since there are no long-distance phone charges.

BUILDING RELATIONSHIPS

Understanding the psychology of cyber-culture is essential to business success. For example, most UseNet readers are so hostile to explicit advertising that they have coined derisive terms to describe offenders. Over-eager entrepreneurs who post the same ad in related newsgroups are accused of "Spamming," in honor of the canned meat. If they post ads in unrelated groups,they commit "Velveeta." Those who do both are guilty of "Jello".

Giving of giving something back to surfers as thanks for their time is a fundamental aspect of Internet culture. Companies whose web-sites deliver one-way advertising receive a luke-warm reception.

"Creating communities of interest is what the Web is all about," Dale Moore says. Instead of direct advertising, L.L. Bean's site provides everything from trail maps to a guide on selecting hiking boots.

"The problem with old media is that they tended towards a more or less explicit attempt to mold, shape, and manipulate peoples' opinions," observes Mark Stahlman. "The fascinating thing about this new medium is that it's about two-way communications with a built-in tendency to reject propaganda."

Lured by tales of Net success--such as the coffee distributor in Hawaii who showed a profit in its first month of operation and the florist on Prodigy which sold $4 million worth of flowers and gifts in 1994--entrepreneurs are flooding the Net as if it was a new Klondike with huge jackpots there for the taking. Cyberbusiness isn't likely to delivery on that promise (nor was the Klondike, for that matter). Still, for those who can keep up with this fast-changing market--and remember the basic principles of any commercial success--doing business on-line is an attractive, affordable risk.

For permission to republish this article, write Gloria G.Brame. Reproduction of this article in any media with written consent of either Gloria or WORKING WOMAN is illegal.