Overstock.com CEO Patrick Byrne on Holiday Sales, Free Shipping

It’s not every day that we speak with a Stanford Ph.D. who has funded the construction of schools around the world. That same person started dabbling in ecommerce a decade or so ago and his company is now a publicly-traded retailing powerhouse. He is Patrick Byrne, and the company is Overstock.com. He’s here to discuss sales strategies, data analysis, and free shipping, among other ecommerce topics.

Practical Ecommerce: What does Overstock do to prepare for the holidays?

Patrick Byrne: Well, a number of things. First of all, our systems. We do a lot of development over the year, developing new technology, and we have to make sure that by the time we get to November 1st, none of it is fragile anymore, that it’s all hardened and bolted down. We don’t even roll much new technology once we get past November 1st because we don’t want anything to break. We also build our inventories substantially.

For this year, we developed some integrated marketing campaigns to go out very aggressively into the market. [For this year,] we’ve cut our prices. We’ve spent the whole year stripping costs out of the supply chain and the marketing chain and we pass a fair chunk of [the savings] back to the consumer. So, our pricing has got exceptionally sharp this holiday season, probably sharper than it’s ever been.

PeC: It looks like your company will grow to something around $750 million for the year in annual sales. What percentage of that will be holiday related?

Byrne: In general, we are growing, again. I do think we should see positive growth for the year and typically, our fourth quarter is close to 40 percent of our annual sales. The period from November to December is close to about 30 percent.

PeC: So, the $750 million in sales sounds low, if 40 percent comes in the fourth quarter.

Byrne: It does sound a little low. It sounded a little low to me.

PeC: Our audience is comprised of smaller ecommerce merchants. What advice would you have for them as they prepare for the holidays and beyond?

Byrne: I have two pieces of advice. One is they can [closely track success] with the Internet. There’s an old saying from John Wanamaker 50, 80 years ago. He said, ‘Half the money I spend on marketing is wasted. The problem is I just don’t know which half.’ The Internet lets you figure out which half. He found out, by the way, it’s not half; it’s 80 percent, 90 percent for a typical company. But with measurement and data on the Internet, you can reduce that to zero. You can reduce waste to zero. You can figure out how to pay back every single marketing dollar you spend if it’s online. So, you have to invest in a system that lets you do that.

Now, 10 years ago, they were hugely expensive and you needed a big development team. Now, you can pretty much get stuff off the shelf through one advertising network or another. MSN has very good technology, DoubleClick, Google of course. They have great technology for advertisers that let you figure out the payback in every dollar.

You really want to keep what you’re spending equal to the gross profit you’re making from the channel and not more, because that way you make money or you break even on the first transaction, then if you can get people to come back, that’s the way you make money. So, the only way to get there is to have a system. Fortunately, for the systems now, you don’t have to buy anything. You can just take part in the right advertising network, some of them have very advanced systems that let you measure the payback and everything you’re doing. That’s one thing you can do.

Another thing is to have some equivalent of what’s called a data warehouse. That can be a very small one that mom-and-pops can afford, but you’ve got to have some sort of central repository of your data and develop techniques. [You can find] the patterns. Just like a brook can be an average of, say, 3 feet deep, but there’s one place that’s 10 feet deep.

You may have 1,000 customers and you’re getting $200,000 of revenue, but if you really analyze where your profit is, what you find is all your profit, you know, 140 percent of your profit is coming out of 5 percent of those customers. Fifty of those customers out of the 1,000 are giving you all your profit and the other 950 people that you’re serving are actually costing you money. What you want to do, of course, is to get rid of them and get more people like the 50. You can’t get there, you can’t do that, unless you have a really good analysis.

If you’re not going to put the time to be doing that analysis, you probably need to stay in a different game because what the Internet is doing is letting people access so much data. There are such strong patterns that can be found. But the people who are figuring out how to find those patterns and harness them are able to strip so much cost out of their system that you’re really not going to be able to compete with them unless you’re willing to play the same game.

Now, fortunately, these systems are cheap and often small enough that even a mom-and-pop business can compete if you sign up for the right advertising networks, which help you with all this. But doing that kind of data-driven marketing is a big part of the game as well as keeping your other expenses low.

PeC: Some smaller merchants reading this may be saying, “Overstock.com is the reason why I can’t grow. It’s impossible for me to compete against a company of that size and magnitude.” What would you say to that merchant?

Byrne: I would say that’s not true. We started off tiny. We started off in a room full of people. So, it’s not true.

But there is an alternative for that person. It sounds self-serving, but 80 percent of our products that you see on our site we really don’t warehouse. We don’t have them. We make deals with all of these smaller mom-and-pop [businesses]. We have thousands of suppliers who drop ship for us and there are people who start off in their garage with us and now have multi-million dollar businesses. They are our suppliers, but they don’t actually ship the products to us. They integrate into us. So, if you have a product that can be sold on Overstock and fits in one of our categories, get in touch.

We have this very simple software that you can integrate to and then we’re doing all the marketing. We’re doing everything that I’ve just said. We’re driving the traffic and converting the customers. We’re handling customer service, handling the credit cards, doing all the things so that customer never really needs to know that it’s actually a mom-and-pop who is drop shipping the product to them. We have well over a thousand of these partners and a lot of them have built very nice businesses, getting a niche, getting it live on our site.

[Our system is] much different than eBay or Amazon’s Marketplace. We are not open to the world. It’s much more of an intimate relationship. We’re not just posting whatever you want, but you work with our buyers, you get your products, you get them up, and we deliver a lot of sales to these kinds of people.

PeC: What percentage of Overstock’s merchandise is closeout or liquidated-related?

Byrne: If I had to pick a number, I’d say three-quarters of it is closeout in one way or another. It’s either bankruptcy or liquidation or somebody somewhere wants to get rid of the inventory. There are different ways that it reaches us. [It could be a] factory that has some downtime, a six-week period where it doesn’t have enough orders to keep busy and so they’ll make stuff for us at a special price, but it’s just to keep their factory busy. Arguably, you could say, ‘Well, that’s overstock, too.’

PeC: Let’s change directions. We write a fair amount here on the topic of shopping cart abandonment and factors that drive shopping cart abandonment. What do you think of offering free shipping?

Byrne: Well, I like free shipping. There’s evidence, however, that customers value it more highly than they should. We noticed on days we have free shipping, suddenly people order disproportionately, say, $500 bookcases. Now, our normal shipping policy is $2.95. So, they are waiting for a free shipping day to order that $500 bookcase. On a normal day, it’s only 3 bucks, so it seems that they are overvaluing the free shipping.

However, if that’s how they value it, that’s how they value it. It’s up to us to adapt. As you talk about marketing, you talk about the differences in the way people shop. Women, especially, do not like sticker shock at checkout. They especially object in getting into the checkout process and seeing $30 to ship a television or something. So, you’re really driving away female customers if you do that.

Men have not as big a problem with it. They have other things they care about. Women care about the two primary things, the shipping cost and the quality of customer service. If you’re selling a product that is oriented towards women, you have to make sure you’ve got great customer service and you got to do something about your shipping. If you’re selling $100 product and you know it’s going to cost you $10 to ship it, probably better off just saying it’s $110 with free shipping. That’s better than saying it’s $100, but there’s a $10 charge in checkout.

PeC: Anything else on your mind today?

Byrne: Best of luck to everybody out there making a go in this industry and don’t forget what I said. If you’ve got great products, but building the site is difficult, remember to look into the Overstock partner program. In any case, best of luck to all your readers.