The Mighty Mini-Dots

Arlene Weintraub–BusinessWeek

When Aron Benon founded Florist.com in 1997, his strategy couldn’t have

been more different from the many dot-coms then exploding onto the Web scene.

Instead of raising millions of dollars in venture capital, he converted half his

tiny Beverly Hills flower shop, Floral & Hardy, into a threadbare online

operation and hired just four employees, including his wife. Still pinching

pennies, he told his Web employees to bring cell phones to work the week before

Valentine’s Day, so they wouldn’t tie up the company’s bare-bones phone

system.

Roughing it paid off big time for the online small fry. Last year,

Florist.com turned a $1 million profit on $3 million in sales. Benon’s success

stands in stark contrast to the fast rise and even faster failure of other, more

high-profile gift sites such as Send.com, which bit the dust in January, a year

after blowing $20 million on a quirky ad campaign. "I knew the bubble was

going to burst," says Benon. "I said, ‘No, I’m going to keep it

grassroots.’ We take one baby step at a time. Only when the business proves

itself to us will we spend the money to get bigger."

Dot-coms may be going down in flames every day, but a surprising group of Web

survivors is emerging unscathed: small businesses, the mighty mini-dots. With

just a handful of employees and annual sales of $5 million or less, these

intrepid independents are doing what almost none of their venture-capital-funded

brethren could: make money online.

Who would have thought? After the rise of big dot-coms such as Amazon.com and

the later arrival to the Web of big retail chains such as Wal-Mart Stores, a lot

of experts predicted the Web giants would crush small businesses like bugs.

Instead, it was other dot-coms–all playing high-stakes, get-big-fast games

with multimillion-dollar portal deals and TV ads–that got slammed. Thousands

of small businesses, flying under the radar, are turning modest but healthy

profits.

Small Biz Makes A Big Splash Online
Small business-those with fewer than 10 employees and $3 million in annual revenues--are going online in a big way. Within three years, they could constitute more than 10% of US GDP

Already, the evidence is coming in. The National Trust for Historic

Preservation, which tracks business in city downtown districts, reports that

Main Street merchants have logged an average 12.8% increase in sales since

launching their Web sites.

Size matters

Now, these mini-dots are proving they’re an online force to be reckoned

with. Indeed, they’re teaching their bigger rivals a thing or two–including

the value of common sense. Unlike some dot-coms with inexperienced executives,

the mini-dots are succeeding by employing the same strategies that

small-business owners have relied on for centuries: They’re sticking to niches

they know well. They scrimp on expenses, forgoing expensive portal deals and

using Net resources, from e-mail to customer-sharing arrangements, to save

money. And they’re banding together on the Web, presenting a bigger face to

the online world.

So far, it seems to be working–so well that small businesses appear poised

to play a greater role in the growth of e-commerce than anyone expected. Small

companies will see their online sales grow 336% from 2000, to $120 billion by

the end of 2002, predicts ami-Partners, a New York consultant to small and

medium-size businesses. That will outpace overall e-commerce revenue growth of

249%.

Of course, size matters, even in the New Economy. But in some crucial ways,

the Net helps level the playing field for small outfits. For one thing, the cost

savings of selling online and dispensing with store rents or direct-mail costs

makes some businesses viable that otherwise wouldn’t be–say, a home-based

collectibles business.

Moreover, the global nature of the Web goes a long way toward negating one

key disadvantage of the small fry: geographic reach. Now, even a niche seller of

specialty pet supplies can amass enough customers to be viable. Finally, the

easy communications afforded by the Net may make more small businesses,

especially services such as graphic design, attractive to larger businesses

seeking to outsource jobs.

The impact of a mini-dot explosion could have big implications beyond the

Web. By 2004, even the tiniest of these e-merchants–those with fewer than 10

employees and $3 million in annual sales–could account for as much as 10% of

the US gross domestic product, according to e-commerce researcher Keenan Vision.

Maybe so, but big questions remain about how much the Net will boost the

number of small businesses and what impact they’ll truly have on the economy.

For one thing, says William Dunkelberg, chief economist for the National

Federation of Independent Business, it’s possible the Net is simply shifting

existing sales online, not expanding markets enough to support many new

businesses. He adds, it’s likely that the most successful online businesses

will put the other mom-and-pops out of business, lessening the net gain. Most

traditional small businesses fail, and the same may well be true online.

And for all its advantages, the Internet presents a lot of challenges to the

little guys, too. In many parts of the country, pokey Net connections limit how

many visitors these sites can handle. And it can be tough for traditional

businesses coming online to handle both channels at once. Those factors may

explain why, for all the small businesses that have launched online, many more

have not yet moved beyond sites that are nothing more than online brochures.

According to ami-Partners, 22% of small businesses had Web sites in 2000, but

only 8% were engaging in e-commerce.

Still, none of these challenges has stopped a growing number of small

businesses from embracing the Web as a new sales channel and productivity tool.

Many of the online newbies are longtime Main Street merchants or

industrial-goods manufacturers. There’s also a raft of service providers–computer

programmers, graphic designers, lawyers, and such–who have left Corporate

America to hang a shingle on the Internet.

The Web is spawning new breeds of small companies, too. They include tens of

thousands of people who never ran a business before but now make a living

selling collectible ornaments, antique toys, and other odds and ends on sites

such as eBay. About 13,000 stores have sprouted on the Yahoo! Stores section

alone since June, 1998.

What these disparate businesses have discovered is that the Net is less a

magic carpet to a newfound land of riches than a tool to turbocharge an already

sound business model. "The Internet is what the telephone was when it was

invented–a way to further our reach," says Wendy Haig, founder of

Washington (DC)-based Global Strategy, which counsels troubled dot-coms.

"With its vast reach, the Internet will enhance any small business that

uses it properly."

How so? First, they’re using the Net’s access to a global customer base

to zero in on defensible niches, instead of offering all things to all Web

surfers. Pets.com, for instance, went bust in December partly because it tried

to sell all kinds of pet supplies–even huge bags of inexpensive dog food with

high shipping costs and margins under 10%. By contrast, Massachusetts based

Waggin’ Tails sells scarce items such as Provi-Tabs dog vitamins and Hi-Tor

prescription cat food. That allows the Web store to charge high enough prices to

turn a 30% profit margin on well under $5 million in annual sales.

In some cases, the Web’s global reach has allowed entrepreneurs to offer

entirely new types of narrowly focused services. Patti Glick, a San Francisco

nurse trained in podiatry, makes a living speaking at companies on foot health

and safety. Before, she had to do a lot of personal networking, such as mingling

at Toastmasters meetings. Now, by participating in various online podiatric

sites and women’s portals, Glick has drawn corporate customers intrigued by

her screen name, "footnurse." She expects to earn $30,000 this year

working part-time hours that allow her to spend time with her 10-year-old twins.

Small businesses also are using the Net to save big bucks–enough, in many

cases, to make a pipe dream a going business. Selling Beanie Babies and other

collectibles online out of a bedroom in his Oklahoma home, Perry Calton is

grossing annual sales in the low six figures.

Besides saving money, the Net also provides mini-dots a wealth of new

marketing channels. E-mail and discussion newsgroups can be far less expensive

and more effective than direct mail and print or TV advertising. Carrie Hardy,

founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends

newsletters to 1,100 past customers and posts messages on scrapbooking

newsgroups. Instead of buying $80, three-line ads in trade magazines that never

drove any traffic anyway, she spends nothing and gets a far better response:

After mailing her February newsletter, sales doubled the next day.

No online marketing channel has proved more effective than online auctions,

pioneered by eBay in 1996. Besides spurring the formation of thousands of new

small businesses online, they have prompted existing businesses to branch out.

Some wholesalers are using eBay to go retail:

Andrew Waites took his Mississippi retail overstock business, Inventory

Procurement Services, directly to consumers over eBay–leading to what he hopes

will be a twofold-plus jump in sales this year, to $7 million, and a gross

profit margin online of 50%, 10 times the original business.

Finally, the Net has allowed far-flung small businesses to gang up and pool

their resources against their bigger and louder competition in ways they can’t

do in the physical world. The American Booksellers Association, which promotes

independent bookstores, runs a program called BookSense.com that allows members

to offer amenities only big chains could offer before, such as gift certificates

good at any member store. Moreover, their online customers can order any book in

print from their site, even if they don’t stock it themselves. Kerry Slattery,

owner of Skylight Books in Los Angeles, partly credits the program for a

higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.

Daunting prospect

All that’s not to say the Web can turn any small business into a raging

success. Most entrepreneurs are running into obstacles on the Web that are hard

to overcome with limited staff and resources. One of the toughest jobs:

providing superior customer service. After all, to make up for what they may

lack in product breadth–not to mention customers’ ability to click instantly

to another site–they have to offer much more personal service.

Another challenge is Internet technology itself. Fast broadband connections

are still largely unavailable, especially in rural areas, leaving many small

businesses stuck with snail-like modem connections. And many worry that they

could lose a lot of customers if their connection goes down. Says Deepinder

Sahni, vice-president at researcher ami-Partners: "What we are hearing is

that they are hesitant to put their crown jewels–their companies–on the

Internet."

For many small businesses, the prospect of competing with the online

behemoths is daunting–for good reason. It may be only a matter of time before

the big guys notice how well they’re doing and jump onto their turf. So they

must stay vigilant, even paranoid, about differentiating their offerings.

That, however, is not the main worry of most small businesses that have moved

online. Their problem: too much business. When Jordan Dossett posted her

graphic-design portfolio a year ago on eLance.com, a Web marketplace for

freelance workers, she was buried under an avalanche of work offers from

companies as far away as Russia. So she quit her job as art director for a law

firm and opened The Design Studio in her Washington (DC) home. After hiring

three employees, she expects to rake in $350,000 in sales–and a tidy gross

profit of $250,000. "I had no idea the amount of demand out there,"

she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of

dead dot-coms would love to have had.

By Arlene Weintraub in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc