The More Things Change…

Gartner Group CEO Michael Fleisher made some major waves last week at his company’s annual Itxpo when he announced that 95 to 98 percent of all dot-coms will fail over the next 24 months. He stated that the new shakeout would cause an unprecedented blending of business models, rapid growth in B2B versus B2C markets, and that wireless and broadband would be the next high-growth areas. And then he dropped the biggest bombshell of all.

Fleisher boldly proclaimed that the new era would be marked by a resurgence of “old economy concepts” such as market share, brand equity, distribution channels, financial control, operational integrity, and excellence.

Whoa! Imagine that!

With the downward spiral of the stock market last week (and, probably this week, too), Fleisher’s words couldn’t have been better timed. After months of wild exuberance and feverish Net hooplah, it seems as if the chickens are finally coming home to roost and yes, kiddies, business is still business.

At the risk of sounding overly sarcastic, I’ve gotta add my own “no DUH!” to this discussion. And several examples from my own life lately have made me think long and hard about what’s going on with the web, and I’ve got a few ideas about where things are going.

Example one. For over four years now, my friend Tonya Goodnow has been running a little homestead in cyberspace called Goodnow’s Action Figure Mart, a web-based business selling collectible action figures. Since 1996, Tonya’s been doing quite well, buying and selling in a niche market and happily running a business from a corner of her home.

She hasn’t made millions, she’s got no venture capital behind her, does no advertising, and has no plans to go public. But she’s supported herself for years, just bought a nice new car, and seems to be happy running around the house with a wireless headset wheeling and dealing in the latest toys. And actually, if you look at quarterly numbers, she’s been making far more profit than most big e-tailers have after paying the bills. Tonya’s a great undiscovered Internet success story and she seems to be happy with that.

Example two. Right now my wife and I are several weeks away from the arrival of our first child, and if I had to point out one major unexpected intersection of my personal and professional lives, I’d have to say that I had no freakin’ idea of the number of direct mail companies out there catering to new parents.

Ever since we registered for our first parenting magazine, not a day goes by that we aren’t inundated with offers, catalogs, and free magazines from more companies than I ever knew existed. There’s baby stroller companies, baby bag companies, baby food companies, baby clothing companies, and baby furnishing companies all vying for our attention. No doubt about it they’ve found us and we’re on the Mailing List From Hell. But we’re buying, too… which probably explains why we keep getting the stuff. It’s quite an education in capitalism and marketing.

So what do both of these examples have to do with the ringing death-knell of dot-coms? Plenty. For while it’s said that 98 percent of most dot-coms will fail over the next few years (a number that I think is kind of high, but not too far off the mark), I’d bet money right now that Tonya and a lot of those direct-mail baby companies will still be around after the 24-month shakeout. And the reason why probably tells us more about what’s going to make it in the new economy (and how to market in it) than a whole passel-o-analyst reports.

What do they have going for them? They’ve all found their niche, have segmented their markets, and are marketing to them with razor-sharp precision. Tonya’s not trying to go head-to-head with eToys; she doesn’t have to. She’s not out shopping for an ad agency to produce her new Super Bowl spot. Heck, she’s never even hired a PR firm. But what she has done is gotten into the word-of-mouth pipeline and become one of the dominant players in her little niche. Sure, Goodnow’s Action Figure Mart may never have a multibillion dollar market cap, but it’s doing fine just the same, thank you.

The baby industry is a slightly different matter as scale goes, but it serves as just one example of what can happen when a company knows its audience, segments its marketing, and uses the tools at its disposal to market to it. None of these companies is going to be the next dot-com billionaire poster child, but many of them seem to be doing fine.

They’ve identified their market which includes me, my wife, and our child-to-be and are pursuing that market with relentless persistence. And even though they’re probably spending loads of money on fancy four-color catalogs, they’re still in business because they’re following the basic precepts of targeting, selling, and ideas such as profitability and appropriate organic growth. Imagine that.

On the other hand, a lot of Net companies have assured us that those outmoded concepts have no place in the new economy. They’re all going to be megaportals or giant consumer destinations that dominate their markets. They’re going to meet every need that every person has and they spend millions of dollars in advertising to convince everyone in the world to come to them. It’s crazy.

There are four things that make e-commerce different from commerce in the analog world. First and foremost are measurement and segmentation. Every action you make on a site is captured, and every action can be measured (yet recently found that only 14 percent of e-tailers are using the data they collect on their customers!).

Also, there’s no “space” in cyberspace, and every location is just as close as any other, so geographical boundaries don’t have to inhibit commerce as they do in the analog world a store on the web is accessible to anyone in the world with Net access.

The web is also a fabulous streamliner of transactions everything can be done without human intervention.

Finally, building a “store” on the web is far cheaper than building a physical store… we’re talking bits here, not atoms.

So why are so many dot-coms going to go under while the direct mail industry keeps chugging along fine (even is going snail mail!) and niche marketers like keep making money?

Simple: They know their markets, they segment their marketing dollars, and they’re not trying to be all things to all people. They’re not going out trying to become billion-dollar companies; they’re just trying to do business the old-fashioned way using the new tools available.

If you think about it, there’s no reason that many of these dot-com e-tailers have to go under. They don’t have to pay for store space, the customers do most of their own service, and many of them don’t have to deal with sales tax and a lot of the other impediments to analog commerce. But many have squandered these advantages and are now on the way out while spending other people’s money. Let’s hope the tide can be stemmed before it’s too late.

Related reading