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‘Dot-com Survivor:’ The New Promotional Products Reality
By: Rick Ebel ,
Issue: 2001jun
So, what about that vaunted dot-com revolution of a year ago that was supposed to change the way companies buy and sell promotional products? With a falling economy, how could those ambitious e-commerce ventures not crash under the weight of their own hype?
Of course, we’ve only finished the early rounds, but the players engaged in the industry’s version of the TV reality show “Survivor” are displaying a lot of resourcefulness and staying power. Not many have been voted off the island.
For sure, it’s been a bull market for skeptics, fueled by the amounts of money that have been thrown around. Early last year, for example, there was considerable consternation when HALO Industries embraced Starbelly.com like a hottie in a singles bar and announced a $240 million deal. HALO’s Promotional Products Group was to be renamed Starbelly. Management subsequently had second thoughts, perhaps reconsidering the value of the HALO brandname, and opted to call its promotional products division HALO Branded Solutions. Meanwhile, the stock market gave shareholders a stick in the eye, making it possible for anyone with only a dollar or two to buy a share.
Nevertheless, the Branded Solutions division continues to integrate its offline sales operations with the online package bought from Starbelly. In the last quarter of 2000, the division added to its account list such trophies as Dell Computer, Coamerica and Dun & Bradstreet. In February of this year, the parent company picked Marc Simon, whose background is in customer relations management, as its CEO and charged him with returning the firm to profitability.
The challenges to online start-ups and offline companies buying online capabilities requires patience and funding so they can hang in there. In trying to change buyer behavior and the ways things are done, you can’t expect everyone to jump on board right away. And after their initial enthrallment with the e-commerce concept, venture capitalists often adopt that Jerry-McGuire-show-me-the-money posture.
As David Verchere, founder of now-defunct corporategear.com, observes, many dot-coms were building business in five-year time frames and then were suddenly asked to produce in six months. “All those businesses that were built to grow are having to be turned on a dime to become profitable,” he says. “It can be a real messy process. It’s like taking an ocean liner and suddenly pushing it hard to port. You’re going to knock over a few deck chairs on the way.”
When you start a business with a new idea, “you have to be flexible and reponsive to what the market throws at you,” Verchere declares. And he should know. Corporategear was introduced less than two years ago as a business exchange, or marketplace, for the promotional products industry. That idea, he admits, was ahead of its time. “Businesses in the industry wanted their own technology and data instead of sharing it,” he explains.
So, corporategear was closed down. In March, management resurfaced as The Buttonwood Group. The firm plans to offer, among other things, streamlined processing between suppliers, distributors and their customers, using “XML-based product configuration technology (e-catalogs) and corporate purchasing portals (company stores).” The XML (for eXtensible Markup Language) technology, Verchere says, can help distributors gain efficiency because they can get all product and order data in one standardized format. Suppliers should benefit because XML enables them to cross-market with other suppliers without the expense of custom catalogs and additional inventory.
Corporategear was associated with the whole dot-com revolution, and people got confused about its function, Verchere explains. “So we repositioned ourselves. We thought we would make a clean slate and start fresh. And it really is a very different business,” he says. And what about this XML? A year ago, Andrew Passino, one of the founders of promoOrder, was telling us that “XML technology is where the marketplace is ultimately going, and we are taking steps toward this.”
“Ultimately” is today, at least for promoOrder. Angie West, the company’s director of marketing communications, reports XML has been fully integrated into the company’s system.
PromoOrder came out of the chute a year ago as an application service provider (ASP) and introduced a pair of company stores. It also became PPAI’s technology partner providing exclusive e-commerce services to members. More recently the company introduced Instant Company Stores, which feature a preselected group of products for which a Web site can be installed and operated within 24 hours. “When we announced that in January, we sold 1,000 stores. It has taken off since then, just huge,” reports West.
Essentially, the dot-com shakeout is a contest of diverse business models. Opines Jeff Lederer, vice president of-business development for Prime Resources Corp., “I think the best strategies are from the mail-order companies, because it’s a natural transition from mail order to the Web.” The mail-order companies, he says, “are the only ones who have branded themselves with national companies.”
Mail order? “Well, that was the sector we thought we could make a killing in, too,” laughs Larry Kavanagh, who a year ago was forming an e-commerce distributor called UBPromo.com. It was to be a pure play, that is, online sales only, and the plan was to use a mail-order catalog to drive traffic to a Web site. By the spring of 2000, the stock market went into fibrillation, and the company’s venture capitalists pulled their term sheets.
“We figured out a different way of making money without needing venture capital,” Kavanagh asserts. UBPromo was laid to rest, making room for DMinSite, a provider of software that runs Web sites for mail-order catalogers who were mostly outside of the promotional products industry.
“One thing we found,” Kavanagh claims, “is that when you integrate your offline mail-order strategy with your online Web strategy and make it easy for the customer to move in both worlds, it dramatically increases sales. The mail-order companies we have Web sites for have literally seen a three-fold increase in their Internet sales moving to our software.”
The synergies of combining mail order with online have been exploited for some time by one of the largest promotional products direct marketers, 4imprint. But only five percent of promotional products is sold by Internet or direct marketing. “We had to see if we were going to be comfortable with that five percent, or do we want to get into that bigger piece of the market where most of the business is being done,” says Greg Iott, vice president of marketing.
That bigger piece of the market, the one served by distributors with traditional sales forces, became reachable when lack of funding forced Promonium.com out of business last summer. Promonium had been set to run the online systems for Adventures in Advertising Franchises Inc., a fast-growing franchisor with 450 or so distributors having more than 1,000 salespeople. AIA had the sales force, 4imprint had the systems. “So, it looked like a pretty good fit for us,” says Iott, explaining his company’s acquisition of AIA.
In addition to gaining 4imprint’s sophisticated technology, Kurt Carlson, COO for AIA, says he expects the acquisition will help his company better itself in terms of importing and company-store fulfillment. He also thinks it will help AIA expand abroad. The Oshkosh, Wisconsin-based 4imprint, he says, “is the largest distributor in the UK, and we plan to bring our franchise opportunity to Europe via our relationship with 4imprint.”
A year ago, much of the industry viewed online distributors at best as only an interesting idea, acknowledges Keith Voigt, vice president of marketing of Branders.com. “I think if you fast forward now to one year later, the online channel is viable and growing. Some of our competitors have made mistakes along the way. Fortunately, we’ve stayed away from most of those,” he says.
And what were those mistakes?
“I think a lot of competitors went down two routes that seemed unsuccessful,” Voigt believes. “One, they went down the pure play model with the Internet, but they were late to the party, and they didn’t have a lot of cash.”
The second group, he says, adopted a mix model. “They tried to use their current sales rep model and combine it with online. But they really don’t go together because the individual salesperson who’s paid a commission has very little incentive to drive somebody online and not get paid a commission any more. So the mix model doesn’t work any more. I think you’ve got to be one or the other.”
The future that Voigt envisions for promotional products is one of traditional distributors and online distributors that are separate from each other.
Voigt’s aversion to the mix isn’t shared by MadeToOrder.com, a click-and-mortar (online and traditional) distributor. By purchasing two distributorships, the Harwood Company and Shea Hammond, last year, it acquired the foot soldiers to sell merchandise offline and provide the creative for clients who demanded it.
According to Vice President of Marketing Maurice Voce, MadeToOrder secured another round of financing at the end of 2000 and is investing heavily in people and technology. “So, with all the craziness in the dot-com area, we’re very secure, we’re growing, we’re meeting our plan, we’re weathering the market storm,” he said at the end of January. “We think in 2001 we’re going to double the company size again.”
Since its inception, MadeToOrder vaulted very quickly from nowhere to become one of the top 25 distributors in sales. Of course, much of that business came with the Harwood and Shea Hammond acquisitions.
But buyouts are not the way MadeToOrder proposes to boost its sales this year. Voce sees the growth coming from the company’s existing Fortune 500 accounts, now more serviceable because of the firm’s increased high-tech and high-touch capabilities. “All of our companies are spending way beyond the amount of business they’re doing with us. So our strategy is to get more and more of our unfair share within our account base,” he explains.
MadeToOrder’s click-and-mortar operations are the antithesis of the e-commerce model of acquiring customers. “They,” claims Voce, speaking in general terms, “are expecting to drive people to their electronic Web site, acquire a customer, develop a relationship, and have them come back to order over and over. While I think it can be done, it’s just an extremely expensive and long-term proposition.”
Voce cites his firm’s analysis that, for small- to medium-size businesses, it’s going to take 12 to 18 months to recoup the initial investment to acquire customers. And that assumes the customer buys at least three times from you over that period of time.
Voce adds, “That’s part and parcel of the problem with the classical consumer side of the e-commerce equation. That’s why they’re all struggling. Look at amazon. It costs so much to acquire. So, either you have deep, deep pockets and you’re in it for the long haul, or you’re in trouble.”
As many traditional distributors come to terms with e-commerce as the only way they can compete for the kind of business they want, they will most likely gravitate to the click-and-mortar model. And integrating a sales force with e-commerce can be a formidable task.
Inasmuch as ePromos.com is a pure play, CEO Jason Robbins doesn’t have to worry about that. But he understands the challenge.
“The big problem,” he says, “is that salespeople get in the way by being afraid of technology replacing them. That’s never going to happen.”
Robbins agrees that the human element is important to the marketing process. “The question is, is a human worth the 40 percent or 50 percent of the profits? Are they worth the split?” he asks. “Well, it depends. If their split is because they’re acquiring the customer, then they should be paid more. But if the brand is bringing in the business for free, who should service that? A customer service person? An inside salesperson? A company can’t afford to build a brand and give all the profits away with commission. Can customers tell the difference between the service they get from an “inside” salesperson versus a fully commissioned salesperson? If they could, would it matter to them?”
Robbins suggests it may be best to try to convince salespeople that, yes, they’ll be making less per sale because their contribution to it is shared with advertising and the Web. But despite the lower rate, they wind up making the same or more money with less stress and happy customers, he declares, “because there are better systems in place. If they can partner with a company that helps them do that better, they should be more productive and more profitable even though they are giving a couple of points away. That starts to talk about the franchise model.”
The franchise model. That’s one of three business types that Verchere sees investing the industry when the dust settles. About the other two, Verchere says:
“There are going to be catalog or e-commerce businesses...it’s the Land’s End business model. You just keep firing catalogs, flyers and newsletters, and you limit yourself to a few thousand products and you just keep them interesting and keep changing them.”
The third growth area, he predicts, will be the program business, exemplified by eCompanyStore.com. “There’s no reason why everybody shouldn’t at some point wind up with a company store--in theory. Getting there is going to take a few years. That was what really made the Internet companies take off so quickly a year ago--everybody thought it would take 10 seconds to set up a company store, everyone’s going to have a company store in two years. It just didn’t happen that fast,” he observes.
Verchere believes each of the three models will require a different kind of sales force and a different profit-margin structure. But the mindset for many in the industry today is to lump those three business types into one. “So, we wind up with our expensive program salesperson selling $200 birthday party programs. It’s not a cost-effective way to approach business,” he declares.
Starting out as a traditional offline distributor in 1994, eCompanyStore became an early convert to e-commerce about three years later. In pursuing midsize to large enterprise customers, it relies on a small sales force to land the contracts. Along the way, the company endured the normal growing pains of an online start-up, the kind that are challenging but often overblown by skeptics.
eCompanyStore started out using an ASP, Pandecis, as its back-office engine. “The idea was easy,” recounts Walt Geer, president/CEO. “You go to market fast and inexpensively because you borrow somebody else’s technology. It made sense for us at the time. It gave us a head start on the big corporate market.”
Then Pandesic shut down.
So, the Atlanta-based e-distributor built its own integrated systems. “It took about six months and cost us a tremendous amount of money. We were unable to take customers live during that period. We put in our own ASP. It’s a mind-boggling, difficult experience, but we pulled it off. Let me tell you, it was tough,” Geer admits.
A particularly dicey part, he says, was telling brand-new clients like Microsoft they had to be put on hold until the following year. He says the response was, “We believe in you, we’ll wait it out for you.”
Don’t all customers say that?
The Pandesic shutdown forced eCompanyStore to lay off some people and close offices in Houston and Chicago. A few more employees were eliminated recently so the company could divert payroll to new departments that had to be staffed.
Geer points to what he sees as a flaw in the overall Internet concept--the notion that, at the onset, you have to build big, go get customers and grow into the infrastructure. “One of the faults is that you don’t estimate where you need people correctly,” he says. “And we’re guilty of it as well. We thought we’d have to have this many people in purchasing, this many people in marketing. And it turns out we can do it with fewer people in some areas but needed more people in others.”
With that experience behind him, Geer is confident, particularly after having just
closed another round of funding. “In this horrible, volatile market, we actually took
another round of venture capital money,” he reports. “It’s worth noting that even in these hard times,
if you’ve got a solid business model, you can still get capital.”
Other dot-coms had to make similar adjustments. At Branders, Voigt reports both subtractions and additions to staff. He says, “What we’ve done in a lot of cases is to reshuffle the skills that we need while we were learning in our first year. Also, we had a lot of technology that we had to put in place, and that’s done. So, we don’t need such a large technology team. We’re very comfortable where we are now.”
He underscores that confidence with statistics. When Branders launched its site in February 2000, it became one of 16,000 distributors in the industry, give or take a few. “In 10 months, we went from number 16,000 to the top one percent of all distributors in terms of sales,” he claims. “If that’s not a success, I don’t know what is.”
Who’s in, who’s out--that’s not really the big story in Dot-comland, Jeff Lederer believes. He says, “Dot-com isn’t such a big thing anymore. You knew eventually this would just be the way people would do business.”
So, the big story is...? “I think the technology angle is where it might be,” he replies.
Despite all the high-tech systems in place, Lederer sees an “incredible” amount of inefficiency and redundance in the industry. “The end user, distributor and supplier all handle the same piece of artwork multiple times. The same is true with the actual order and even calling on the orders. Imagine if this step were done only once or not at all. Some technologies will eliminate all of the steps or greatly reduce them,” he claims.
Lederer cites the use of middlewear platforms--software that connects two otherwise separate computer applications--as just one example of how this efficiency can be accomplished. There are already several middlewear providers on the scene, among them promoOrder, ASItransact.com and Buttonwood.
PromoOrder’s Angie West agrees that we are seeing a contest of technologies. She says, “We predicted a year ago there would be a lot of what we would consider (to be) competitors. And they have fallen by the wayside. So, it’s kind of…who has what.”
No question that seamless, unduplicated movement and updating of data on the customer-distributor-supplier axis is an e-commerce priority for many. At ePromos, Jason Robbins remarks, “You know, we see a lot more orders than most distributors see--hundreds of orders a month. So we get to see supplier weaknesses, and work with them to iron out the rough edges. Certain suppliers just can’t get out of their own way, but a great many are making tremendous strides and are flexible in the way they deal with different types of distributors. Our customers demand smart, efficient and practical customer service, ePromos is providing this on the “front end,” in the way we interact with our customers during the sales process, but to reap the benefits of technology in the supply chain our suppliers are going to have to make some significant changes.”
Perhaps to the dismay of the bloodthirsty, the early rounds of the dot-com shakeout haven’t wreaked the carnage that some expected. Certainly not like the NASDAQ has been telling you about the consumer side. About the only conclusions that can be drawn so far are these:
Weaknesses and miscalculations have been discovered, and the players are working to repair them.
One guy’s banana-slip is somebody else’s opportunity; e.g., 4imprint and AIA.
The superiority of one e-commerce model over another is yet to be determined--and probably won’t be anytime soon. But when--or even if--that happens, would you be willing to bet we’ll be seeing a co-existing e-commerce pluralism?
The notion that “if we build it, they will come” is a myth. As Branders’ Voigt observes, “If you build it in the woods and no one can hear you, nobody will come. You have to do some marketing at the beginning and get your name out.”
Salespeople--especially those with a propensity for big accounts--can be won over to online. Citing MadeToOrder’s experience, Voce says, “If their bread and butter is servicing the Fortune 1000, they are embracing the (online) strategy and working with us to deploy it, because their clients are saying, ‘You’re out if you don’t have it.’”
Despite the fact that, after a flurry of hype, conjecture and activity, we are now just seeing only a tunnel at the end of the light, there is a growing concurrence among players and spectators with Walt Geer’s assessment: “I think if there is an industry that lends itself well to Internet solutions, this is it.” PPB
Rick Ebel, former marketing communications director of PPAI, is principal of Glenrich Business Studies, a business writing and research firm in Hot Springs, Arkansas.
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