Thinking Out Loud: David Fry, President and CEO, Fry Inc.

Web Profits 101

David Fry founded Fry Inc. in 1994. Today, it is one of the most prominent Web site development companies, with clients including Inc., Borders Group Inc., Godiva Chocolatier Inc.,, Neiman Marcus Group, Eddie Bauer Inc. and Spiegel Catalog Inc. Fry hatched the idea for his firm soon after returning to his family’s printing business and realizing that the then-fledgling Internet could alter forever the way clients communicate and promote their products. CIO Insight recently asked Fry about the future of e-tailing and his strategies for driving a Web site into the black.

What does it take for a retailer to make money on the Web?

You have to manage your expenses relative to your revenues. It is possible to run a Web-based business economically from a pure technology and manpower standpoint in 2003. And depending on what your product is, fulfilling your service to your customer may or may not be expensive. What is definitely expensive is building the interest and brand equity to drive traffic to your site. Many businesses have found the marketing costs to be greater than the gross margin they can generate by providing their services over the Web. That is why nearly all “pure-play” e-commerce sites have died off. On the other hand, if you can leverage an existing infrastructure and marketing channel, then it’s very possible to be profitable on the Web. Nearly 90 percent of all multichannel e-commerce companies have profitable Web operations today.

How important for Amazon’s future is its partnerships with retailers?

It is the key to accelerating growth. Amazon is approaching the ceiling of rapid growth in books, music and videos, and offering technology to retailers is a great way to increase its revenues.

Amazon has had to confront many different product categories and different retailer business rules as it has expanded its stores. The requirements to sell a book are quite a bit different than what Eddie Bauer, for instance, will be looking for to sell a sweater, which can come in multiple sizes and colors and to which the customer may wish to add a monogram.

Which technologies are critical for profitability on the Web?

Obviously, all the necessary technical capabilities to process orders efficiently, provide real-time inventory information to customers, track orders during shipping, respond to e-mails quickly, etc. Beyond this, you should have targeted technology to improve specific site performance. Since nearly 50 percent of all shoppers use onsite search today, it is exceedingly important that e-tailers upgrade onsite search engines. Many sites can realize a 15 to 25 percent increase in revenue just by implementing this feature.

In addition, companies should develop a program to manage “keyword buys” on search sites like Google. [Editor’s note: Most search engines offer the option of purchasing specific keywords and phrases, which ensures that a site gets preferential placement when users search those words.] Increasingly, the traffic to an e-commerce Web site comes not through the home page but to an interior product page that was revealed on a third-party search site. Successful retailers manage the purchase of specific keywords like day traders managed their portfolios in the 1990s. If you run a Web site selling bathing suits, for instance, you may find that purchasing a word like “bikini” is very cost-effective in March and April, but it is too expensive in October. So you’ll dump it in favor of a cheaper word like “one-piece.”

And companies should make sure they make the most of their hits, by investing in a data-reporting package and working with a data analysis vendor to really understand what users are doing.

Can a pure-play e-tailer make a profit and succeed long term on the Web?

The odds are long against it. The secret of success is in managing your infrastructure and marketing investments against your revenue.

eBay is a wonderful example. It started with a relatively meager technology investment in the 1990s and essentially zero marketing costs. Because of its business model, eBay didn’t need a supply chain or fulfillment infrastructure. Excited users told all their friends about the fun they were having, so the site grew virally. But it’s hard to capture that magic.

So start small and grow as your business allows. Don’t make a major investment on the expectation that your business will grow to support it. Most likely it won’t [do so] in time. This is the opposite of Amazon’s model. Amazon invested heavily from Day One and succeeded by having enough growth to stay ahead of its debt load. But Amazon only succeeded because it had literally billions of dollars of public-market cash to work with. It probably could not do the same in today’s world.

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