How art.com™ Uses ABC to Succeed

Strategic Finance, March, 2001 by Thomas L. Zeller, David R. Kublank, Philip G. Makris

The days of venture capitalists being caught up in the euphoria of dot-com mania--and throwing money at Internet start-ups--are over. Dot-coms no longer have a free pass to Wild West spending of venture capital dollars. Along with venture capitalists, shareholders, bankers, and employees holding stock options are demanding that management have profits on the radar screen. It's time to create real wealth, not just anticipated wealth. Many of these start-ups have flipped, which means they have matured through the start-up phase and have been purchased by large organizations or are free-standing through an IPO. One flipped company--art.com[TM]--turned to professionals to build a long-term successful business. The company uses activity-based costing (ABC) as a tool to guide leadership in resource allocation and decision making.

art.com[TM], which sells print and framed print art, opened its website in the spring of 1998. Following a typical launch-and-learn strategy, the company formalized processes to efficiently and effectively serve the customer by the summer of 1999. Their fundamental thinking? Selling to repeat customers is important to financial success. The entrepreneur then flipped art.com[TM] to a much larger enterprise in the spring of 1999, and, at that point, they brought in professional leadership to channel the entrepreneurial spirit into a successful business. ABC played a key role.

THE COMPETITIVE LANDSCAPE

Dot-coms swim in a very intense competitive sea because brick-and-mortar and dot-com businesses are targeting the same customers. Both are racing to brand products, carve out market share, and build name recognition in the Internet space at Internet speed. Jeff Bezos, e-CEO of Amazon.com, compares this environment to the Cambrian Period of evolution, the earliest Paleozoic Era beginning about 570 million years ago. In a May 24, 1999, edition of Fortune, Bezos said, "That was when the earth had the greatest rate of new life. What people don't know is that it also had the greatest rate of extinction." To avoid extinction, managers of dot-coms must face two major issues:

* What infrastructure resources and related support systems must be in place for an e-tail business to earn a profit?

* What's the best way to advertise and promote a product so that the customer clicks through to the site and buys a product? Related to this issue is how much does it cost to earn a new Internet customer and then have them come back again and again--The Holy Grail of the dot-com world.

Let's look at these challenges. The opportunity to sell to the customer is limited to visual suggestions and text in a dynamic billboard. The sales staff doesn't have the opportunity to "show and tell" and educate a customer, build a customer relationship, and close a sale. A customer must also wait for product delivery. That's why customers must be able to buy what they want in a timely manner with minimal effort. An Amazon.com repeat customer can make a purchase with little effort. To do so, management must work the entire value chain to meet customer needs and wants.

If management can efficiently and effectively overcome these challenges, an Internet business can make a mint. If not, they can go broke. Forrester has predicted that online grocery sales in the U.S. will reach $10.8 billion by 2003 and online toy sales will grow to $1.5 billion in 2003. E-business-to-business market potential is projected to be substantially larger. But now the validity of these projections is being questioned.

UNIQUE E-TAIL ACTIVITIES

A 24-month study of art.com[TM] maturing from start-up to successful business venture identified 12 activities (distinct components of work functions and related tasks). Activities 2, 3, 6, and 7 are unique to an e-tail business, while the others are similar to those in brick-and-mortar companies. (See Table 1). Each unique e-tail activity will help leadership manage resource consumption.

WEBSITE OPTIMIZATION

Website Optimization (Activity 2) compares to managing the traditional retail floor. The complexity of a website, number of site pages, and number of changes all drive resource consumption. This dynamic billboard must always look fresh and inviting to earn repeat business. At art.com[TM], for example, information technology staff must upload Christmas prints and matting options before and during the holiday and, of course, remove them after the holiday. Modifying a few pages on a small site is relatively simple, but it's resource-intensive on a large site because of the many links to product and service options, affiliates' sites, and the accounting system. The lesson learned by everyone in e-tail is that website optimization is more costly than they planned. Just how costly is the unanswered question at this time.

When changes are made, the returning customer must be able to follow a similar and easy click-through pattern to make purchases yet see and feel the new product offerings. And to top off the challenges, the storefront life can be as short as two weeks but can range up to six months depending on the products.