Tuesday, September 7, 2010

Bessemer's Top 10 Laws of eCommerce: Introduction

The dot-com bubble is long behind us, but online commerce is still red-hot. In the late 1990s, the conventional wisdom was that the transformation from “bricks to clicks” for retailers would happen almost instantly. Yet over the past ten years, it’s become clear that the shift to the Web was not a two- to three- year revolution, but a 15-20 year evolution.

According to comScore, non-travel/auto/gas/food e-commerce sales represented just 7.1% of total retail sales in the US in Q2 2010. But, significantly, online sales have grown at an annualized rate of 9.7% since 2006 (vs. the 2.3% annualized decline in total retail sales over that same period, which includes the Great Recession). Leading online retailers, like Amazon.com, are growing even faster—30% per year for the past several years. This growth in e-commerce should only accelerate.

Companies like Zappos, Bessemer portfolio company QuidSi (operator of Diapers.com and Soap.com), Vente Privee, Netflix and others are creating new online-retail categories and pulling offline dollars onto the Web. But a lot has changed since the heady—and money-losing—days of eToys and Pets.com. Today’s successful e-commerce sites don’t just throw products up on a Web site and spend tens of millions of dollars on traditional brand advertising to promote them. The rules of the game today are much more complex and, in many ways, scientific: They involve astute use of targeted, direct-response advertising, for instance, and careful calculations about the lifetime value of each customer. Those leading the e-commerce pack today also display a laser-like focus on customer service, including offering fast and/or free product delivery. (Consider Zappos, which ships customers their shoes overnight.)

At Bessemer, we’ve been lucky to have participated in each successive wave of retail innovation since the mid-1980s, starting with our investments in “big-box” retailers like Staples, The Sports Authority, Dick’s Sporting Goods and Eagle Hardware & Garden. In the late 1990s, we funded several first-generation Internet retailers. Some of these early-stage investments, like Blue Nile, became successful public companies and went on to embody the initial promise of online retail. Others, like eToys, burned brightly for a time but faded quickly in the face of the uneconomic (read: way-too-expensive) customer acquisition model that plagued many early Web pioneers.

Together with the e-tail industry at large, we learned lots of hard lessons about building sustainable and valuable e-commerce businesses. That can only be done, in our view, by focusing on the smart development of a consumer brand through profitable customer acquisition and extraordinary customer service. Among today’s successes, according to those criteria: QuidSi (operator of Diapers.com and Soap.com), Delivery Agent and Onestop Internet. Moreover, we continue to invest in other types of category-leading companies that play in the e-commerce ecosystem, like Criteo and Convertro, which are becoming indispensible tools to help e-tailers exploit the increasing complex opportunities in online marketing

So now, we offer our own rulebook for this dynamic and rapidly growing sector—Bessemer’s Top 10 Laws of E-Commerce.  I'll publish each rule here on my blog for the next five Tuesdays and Thursdays.  We intend to turn this into a white paper eventually, so to the extent you have any feedback or thoughts, please let me know!  So without further ado:

  1. You must build a brand, but not through brand advertising (link)
  2. Customer Lifetime Value (CLTV) is your new pulse (link)
  3. The 6 “Cs” are your vital signs: Ignore them at your peril! (link)
  4. Your goal: cheap, fast and free (link)
  5. It’s the service, stupid (link)
  6. Only lemmings focus on last-click marketing (link)
  7. Affiliates are risky. Don’t let them pick your pocket. (link)
  8. WWAD (What Would Amazon Do)? (link)
  9. Identify your best customers, encourage customer loyalty, and motivate the evangelicals (link)
  10. Keep it social, but keep your data too (link)

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