Powell's Tactical Choices
The rigorous eye Powells.com keeps on earnings stretched to tactical choices the company made as well. Early on, it decided to sell new books at full price and to concede bargain hunters to Amazon. That's because a discounted book is simply not a profitable sale, Sontz insists. Instead, Powell's staked out a claim to the higher-margin used-book business, which accounts for 75 percent of its online revenue.
Because used-book sales are moneymaking transactions, Powell's can offer free shipping on any purchase over $50 and still not lose money. The result: While many of its customers come to the site to buy a few less-expensive used books, after they surpass the no-cost shipping threshold, they're likely to purchase new books as well. "We aligned the free-shipping strategy with the profit returns we could expect from each used-book sale," Sontz explains.
Consequently, Powell's Web site has never drained cash from the company even as it significantly expanded the bookstore's customer base well beyond the Northwest, bringing in millions of dollars in new revenue from other parts of the country that Powell's otherwise wouldn't get. Powells.com accounted for nearly 30 percent of the book chain's sales last year of more than $80 million, up from just 10 percent in 1999.
The success of sites like Powells.com turns the already somewhat hackneyed idea of "path to profitability" on its head. While pure-play e-commerce companies have struggled in vain to eke out earnings using the traditional measure of revenue minus expenses—hoping that, eventually, sales volume would simply overwhelm costs—a variety of traditional retailers are engaged in an innovative effort to rethink the concept of Web earnings and what the Net delivers to overall operations.
What makes this re-examination significant is that it's producing new and more precise methods for tracking profitability and return on investment from online operations as well as fresh strategies for leveraging operations across the retailer's multiple channels.
"Retailers have figured out that there are multiple advantages and beneficial ripple effects from having a Web site, and most of them have nothing to do with the initial fantasy e-commerce business model—that somehow if you just sell tons of stuff online, the earnings will automatically roll in," says Kate Delhagen, director of retail research at Forrester Research.
How Companies Reap Returns: A variety of bricks-and-clicks companies are turning to more sophisticated metrics, which we call e-ROI, to determine the true gains they are receiving from their e-commerce initiatives.
"To measure the real value of the Web, companies have to examine the cumulative positive effect of the Internet on the total retail operation, and then look at this effect in real dollars and cents, not just assumed value."
At the core of this approach—let's call it e-ROI—are new ways to measure profitability that quantify the Internet's impact on some of the most important metrics of a retailer's performance, rather than isolating Web gains purely to what occurs on the Internet.
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