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How low can you go?

In a world where the stock market seems to value revenue, page views, and growth more than profits, the ultimate business model would be to sell a dollar for 85 cents. You could always make up the difference through ad revenues.

    "If you gave it away, would you be satisfied?"
    -- Sammy Hagar, Would You Do it For Free?

    A few months ago I suggested that in a world where the stock market seems to value revenue, page views, and growth more than profits, the ultimate business model would be to sell a dollar for 85 cents. As the argument went, you could always make up the difference through ad revenues. Where there is a will, there is a way.

    Scott Blum, the CEO of Buy.Com, has introduced a model that is not too different from the one I imagined. He sells consumer products at or below cost, is creating a brand synonymous with low price, and hopes to become the leading e-commerce portal. He even plans to make up the difference through advertising. While most Web sites are shifting from a content model to a commerce model, Scott is using commerce to draw eyeballs.

    Buy.Com first opened its virtual doors as BuyComp, a company that focused on selling computer products at extremely low prices. As Blum has a aversion to touching inventory, he chose a model in which products were drop-shipped directly from the wholesaler. In mid-November, BuyComp acquired SpeedServ, a lesser-known online retailer of books and video, from the powerful Ingram distribution family. As a result of this product expansion, BuyComp changed its name to Buy.Com and is now planning to expand into multiple product categories. The company has purchased over 2,000 domain names that begin with "Buy," which may give some indication of their direction.

    Buy.Com's tag line, "The Lowest Prices On Earth," may be the most precise positioning statement of any company that ever existed. The company is ruthlessly committed to being the low-price leader--even if this means they lose money on every sale. They have gone so far as to develop technology that searches competitor's sites, to make sure they have the lowest prices on the Web.

    Perhaps the best example of their low-price commitment is the Palm III Organizer from 3Com. The product currently sells for $248.95 on Buy.com but has sold for as low as $209 on the site. Compare that to $299.95 at Cyberian Outpost, $329.95 at CompUSA, and $369.00 on 3Com's own web site (prices as of Dec. 10, 1998).

    How successful is Buy.Com? This all depends on how you measure success. The CEO states that the company sold $15 million worth of products in October, and is forecasting sales of $19 million in December. At this pace, he believes Buy.Com can break Compaq's first-year sales record of $111 million, making it the fastest growing company in U.S. history. Of course, one could argue that revenue is not the proper metric for measuring the success of a company with a potentially negative gross margin.

    Over the long run, industries with low margins have traditionally sold at significantly low price-to-sales ratios, with most distributors trading well below 1 times sales. Besides, if all you are interested in is revenue growth, you might want to sell a high-priced commodity like oil or steel below cost. You could probably hit $1 billion in your first year.

    As you might suspect, Buy.com's competitors shrug it off as a farce, often comparing the CEO to "Crazie Eddie," the low-price leader in a previous retailing revolution who eventually found his way to prison. Similarities do exist, as Blum is no stranger to controversy. A company he founded earlier in his career, Pinnacle Micro, was involved in some questionable behavior that raised the interest of the SEC.

    Again mirroring Mr. Eddie, Blum is as confident and boisterous as they come. He has openly challenged Amazon.com as his primary competitor and has even reserved the URL www.10percentoffamazon.com for an upcoming promotion.

    Other entrepreneurs and competitors, whose businesses are founded on the standard notion of selling goods at a profit, pooh-pooh the idea. "It's unproven," says Julie Wainwright, CEO of Reel.com. Others point out that retailing is about more than just pricing, and suggest that Buy.com comes up way short on other important metrics such as customer service, ease of use, and overall customer experience. While it's easy to be skeptical of this "crazy" new model, we may have more to learn by asking "What if it works?" than by espousing, "Why it will fail."

    Let's begin with branding. Is it reasonable to assume that someone could build a brand around the concept of "the lowest prices on Earth?" This is fairly straightforward, as there really couldn't be a simpler message for customers to understand. The success of Wal-Mart, as well as the impressive early growth of Buy.com, are both testaments to this fact.