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Tuesday, November 14, 2006

Internet and new technology failures: Pets.com

Pets.com

In the mid-1990s, when the commercial potential for the Internet was beginning to be realized, people started to register Internet addresses with no intention of using them. This so-called land-grab was fuelled by a desire to sell these addresses at a later date.

Indeed, names such as business.com and sex.com proved to be so attractive to certain companies that millions were paid for the right to set up a Web site at that address. The belief was that if someone was looking for business information or pornography they would type a generic name into the address box in the assumption that it would lead to a relevant site, if not the most relevant site. It was also anticipated that such a name would be easy for Internet users to remember.

One of those who set about registering addresses was Pasadena-based entrepreneur, Greg McLemore. Among the hundreds of generic names he chose was Pets.com. However, instead of selling the name he decided to use it himself in a bid to target the highly lucrative US pet market.

This wasn’t just going to be any old Internet company. Pets.com was set to be huge. Immediately after founding his venture McLemore relocated to San Francisco and went on the hunt for investment. In early 1999, he found it.

Hummer Winblad Venture Partners, a highly respected venture capital firm based in Silicon Valley, liked what it saw and decided to fund the company. So did Jeff Bezos, owner of a golden Labrador retriever and a certain online bookstore called Amazon.com, who was sold a 50 per cent stake in Pets.com.

In a March 1999 statement to the press Bezos declared his enthusiasm. ‘We invest only in companies that share our passion for customers,’ he said.

‘Pets.com has a leading market position, and its proven management team is dedicated to a great customer experience, whether it’s making a product like a ferret hammock easy to find, or help in locating a pet-friendly hotel.’

Julie Wainwright, Pets.com’s CEO and negotiator of the deal, was equally happy. ‘This is a marriage made in heaven and clearly positions us as the online category leader. The successful investment track record represented by Amazon.com and Hummer Winblad really makes this a CEO’s dream team.’

The press statement also included a statistic from the Pet Industry Joint Advisory Council which stated that in 1998, the US pet category was valued at US $23 billion. As the online leader of this sector, Pets.com was clearly set for success. After all, the Web users had already proved themselves willing to pay for books, CDs and software via the net, so why not pet products?

However, it soon became clear that Pets.com was not going to be the only major online player within the industry. Petopia.com, another San Franciscobased company, had managed to secure US $9 million from another highprofile venture capital firm, Technology Crossovers, who believed strongly in the pet market’s online potential. It also gained investment from one of

the leading ‘real world’ pet companies, Petco. Petco’s longstanding rival PetsMart was equally keen to gain a piece of the action, and launched PetsMart.com. In addition, there was Petstore.com, backed by the Animal Planet cable network.

However, throughout 1999 Pets.com managed to keep a nose ahead of its three main competitors, securing a further US $50 million from investors.

To gain further advantage it decided to cut its prices almost in half. Competing on price would never be enough though. If Pets.com was to stay in front of its rivals into the long term it would need to create a strong brand identity.

It therefore enlisted the help of one of the largest advertising agencies in the US, TBWA/Chiat Day, to come up with a nationwide advertising campaign.

The campaign centred around a lovable sock puppet, designed to be a ‘spokesdog’ for the Pets.com brand. There was a great PR story about the creation of the sock puppet, which apparently involved putting together a sixpage biography for the character. The adverts featured the puppet in a variety of different situations, such as flirting with housecats and protesting against socks being used as Christmas stockings. They also featured Pets.com’s new strap line: ‘Because Pets can’t drive’. (No-one pointed out that most pets can’t use computers either.) To ensure a maximum level of public awareness, the ads were aired during the Superbowl, the most contested and expensive of all advertising slots, as well as other commercial breaks with high audience figures.

The sock puppet became an overnight success. He appeared on Good Morning America and was interviewed by People magazine. He was floated down the streets of New York in Macy’s Thanksgiving Day Parade and starred in his own line of licensed merchandise. By now he was more than a brand mascot, he was an A-list celebrity.

However, while the sock puppet had successfully caught the public’s imagination, his popularity did not translate into sales. By the beginning of 2000, Pets.com was attracting fewer than a million visitors a month to its Web site.

The strategy of offering extreme discounts clearly wasn’t working. According to Dan Janal, author of Branding the Net, the cost per customer acquisition for Pets.com was about US $80. ‘There’s no way you make that back when you sell a product with a paper-thin margin – and have ten other competitors doing the same.’ But its discount policy wasn’t Pets.com’s only problem. It had also introduced free shipping – which was proving increasingly expensive for the company to sustain, especially when customers were ordering heavy bags of cat litter.

As with many other ill-fated dot.coms, Pets.com spent too much money on building awareness, and too little time questioning whether its Web site was a viable business in the long term. As a result, the company was spending over US $3.50 on marketing and sales expenses for every dollar it made in sales.

According to its many critics, Pets.com was too focused on ‘going public’ on the stock market, so that it could issue stock to investors in an initial public offering or IPO. As John Cassidy explains in Dot.con, Pets.com provides a classic example of how the Internet boom had inverted the traditional order of business:

Instead of using the stock market to build companies, venture capitalists and entrepreneurs were now using companies to create stocks. Costly marketing campaigns were launched not only to attract customers but, more importantly, to grab the attention of potential shareholders. The task of building the company was secondary – a chore that had to be performed before the IPO.

Perhaps the main problem was that Internet users weren’t ready to order their pet food online. Unlike Amazon, where customers could order rare titles they couldn’t find in their local bookstore or record shop, Pets.com failed to offer real added value in terms of products. After all, dog food is dog food, and there clearly weren’t enough people searching for ferret hammocks and other rare pet items that they wouldn’t be able to find in their hometown. The only way the company could attract custom was to sell products below cost.

On 7 November 2000 Pets.com announced that it could no longer continue as a business, and as such became the first US dot.com on the stock market to close. In a statement made to the press on that same day, CEO Julie Wainwright explained the situation. ‘It is well known that this is a very, very difficult environment for business-to-consumer Internet companies,’ she said. ‘With no better offers and avenues effectively exhausted, we felt that the best option was an orderly wind-down with the objective to try to return something to the stakeholders.’

Pets.com, as with boo.com, shows that a successful brand depends on a solid business plan. No matter how effective a company’s advertising and PR proves to be, unless it can differentiate itself in terms of product and service and add real value, it will be left stranded.

There have also been some doubts about the effectiveness of the advertising in the first place. Andrea Reisman, CEO of Pets.com rival Petopia.com believed Pets.com was targeting the wrong people. ‘We don’t advertise on the Superbowl,’ she said. ‘That’s not where our customer is.’

There is no denying that the adverts did have a lasting appeal though. Indeed, the sock puppets were among the most popular items sold on the Pets.com Web site. Ironically, the mascot used to build the brand had become bigger than the brand itself. Even after Pets.com had announced it was shutting up shop, interest in the sock puppet character was strong enough for him to be invited back on Good Morning America. Towards the end of the interview, the show’s host asked the puppet if he had any advice for the investment community. And the puppet’s response? ‘Don’t invest in dot. coms.’

Lessons from Pets.com

  • Differentiate your brand. No market can support dozens of companies with similar business plans.
  • Add value. ‘In a product area where the retailer adds no extra value, Pets.com was doomed to disaster the day the first wave of competitors came along,’ says e-marketing expert and author Dan Janal.
  • Don’t compete on cost. As discounts were the company’s major selling point, Pets.com’s profit margins eventually shrank to nothing.
  • Don’t rely on gimmicks. Sock puppets may be popular, but they can’t singlehandedly support a brand. Just ask ITV Digital.
  • Recognize that emotion isn’t enough. Pets.com vice president of marketing, John Hommeyer, was very proud of the bond the company had created with its customers. ‘It’s one of the few dotcoms that’s really built a brand and established an emotional connection with consumers,’ he said, shortly before the company’s closure. When dealing with an online brand however, emotion isn’t always enough to get consumers to buy online.
  • Have a strategy. Pets.com’s insufficient strategy was highlighted at the time by Michael Dunn, CEO of branding consultancy Prophet Brand Strategy.
  • ‘Most people have a playful, fun relationship with the sock puppet, but it has yet to translate into a compelling brand story that makes people want to transact with the company. Building a brand devoid of a clear business strategy is a recipe for failure.’ And so it proved.

2 comments:

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Petzy said...

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