Separating dotcom winners from losers

Last month, Webvan Group Inc., an Internet grocer since 1999, declared bankruptcy, fired its 2,000 employees, and closed its doors after burning more than $830 million. In doing so, Webvan joined more than 210 Internet companies - or dotcoms - that went out of business in the past year.

Nowadays, it seems that all dotcoms are doomed to fail, much as they were seen as success stories less than two years ago.

However, the fact is that some dotcoms are successful and many others are complete failures, and the question is: What separates dotcom winners from losers? Is it, as has been widely speculated, the ownership of proprietary technology? Having an efficient distribution system? An ability to innovate rapidly? Rapid market expansion? Large monetary resources? Sorry. None of these.

Rather, six factors separate winners from losers. Compared with dotcom failures, successful dotcoms have (1) strong management with clear vision, (2) impeccable execution of customer-friendly websites, (3) excellent customer service, which results in (4) very positive reputations, (5) strong customer loyalty, and (6) market-share leadership.

That's what I found from studying 48 dotcom winners and losers that went public in the past few years, including both B2C, (business-to-consumer), and B2B, (business-to-business) firms. Examples include Ebay, E*trade, Priceline, Exodus Communications, Hot Jobs, and Net2Phone.

Almost all winners had strong, experienced management, excellent customer service, outstanding reputation, customer-friendly websites, loyal customers - and they were market leaders. Many of these winners, such as E*trade, Ebay, AOL, and DLJ Direct, were increasing their profits in spite of the economic downturn, especially in the technology sector, to which many of these dotcoms belong. Ebay CEO Meg Whitman built a consistently profitable, customer-friendly business that has been enjoying a great reputation, customer loyalty, and dominant market position with more than 30 million registered users. Ebay not only made a profit in 1999 and in 2000, it also increased its profit by 500 percent in that time period.

Steve Case, AOL Time Warner's Chairman, grew the AOL business to 29 million loyal customers. AOL's profit between 1999 and 2000 increased by 44 percent. Less widely known are Art Technology Group and E*trade. Art Technology Group has been making a profit building custom e-commerce websites for the likes of K-mart and Hilton Hotels. E*trade, the online brokerage firm, is generating a profit from more than 3 million account holders.

On the other hand, most dotcom losers had inexperienced management, weak customer service, customer-unfriendly websites, unfavorable reputations, disloyal customers, and a frail position in the market. Many of these dotcom losers were not only losing money, but their losses were increasing. Take the examples of Bluefly and Net2Phone.com. An online retailer of discount designer fashion, Bluefly's management has been unable to win customer loyalty and a solid market position. Between 1999 and 2000, Bluefly's losses increased by 20 percent, and the infusion of millions of dollars by George Soros, an astute and influential international investor, did not stop the red ink. Net2Phone, an Internet provider of phone services, increased its losses almost fivefold in the same time period, because of the inability of its management team to create and sustain customer loyalty and make a profit.

Equally important, many factors, that have been widely reported to be critically important for the success of dotcoms and guided their decisions did not separate effectively between winners and losers.

Accordingly, dotcoms with low cost structure, proprietary technology, efficient distribution, and deep pockets are not necessarily success stories. For example, Pets.com, eToys.com, and Garden.com, all of which have folded, emptied their deep pockets and spent a fortune on advertising in the hope of increasing their sales and profits by creating customer awareness, positive attitudes, and product purchases. Instead, their losses only increased. So much for conventional wisdom. In the case of Pets.com, the company spent $185 on every new customer to sell $35 worth of pet food!

These factors which separate dotcom winners and losers follow a simple logic: To succeed in the dotcom economy, one must start with an experienced and insightful management team that is able to welcome its target customers to friendly and well-appointed "living rooms" (websites), and follow up with excellent service.

Feeling well served, these customers spread the word and help develop a positive reputation for the dotcom. This results in increasing customer loyalty, manifested in repeat purchases by an increasing number of customers. Market- share leadership is the natural result of this process.

A closer look at these six factors shows that all but the management factor are marketing variables, including customer-friendly websites, customer service, customer loyalty, reputation, and market share.

This suggests that high-quality marketing know-how - not just a clever software program - is critical for success in the dotcom world. The six factors which separate dotcom winners from losers are some of the key success factors in any business.

In this respect, the new and old economies are one economy: Business is business, period.

Avi Shama is the Rutledge Professor of Management at the Anderson School of Management, University of New Mexico.