Some Successful Small Businesses on the Web

In 1989, the Adventures in Food on Prodigy (GO:AIF) invested $25,000 including $10,000 for licensing and $15,000 for inventory equipment as start-up costs for their virtual store. The Hellers own a virtual store on CompuServe, and in 1995 they opened a la Modem. Their business is based in Hampton, N.H., and receives 90 percent of its revenues from online sales, but in 1996 they finally broke even with their capital investment.

"It's been a large capital investment in getting business to grow," Herb Heller said. "We've seen continual double-digit growth every year. We consider this an investment in the future."

Another online business is a small clothing retailer targeting female sailors. Ursula Kuehn owns She Sails and spent $3,000 to get the print catalog changed into a home page and paid a "Web master" $300 per month to update the site. She used to spend $20,000 to mail 12,000 catalogs. The site became profitable even before it was advertised.

"It took a little over three months to get the return on my investment, and that was from people who just happened across my Web page. I get about 200 visits per week. The response in dollars is roughly two orders of at least $200 each page per week. It's the same 1 percent to 2 percent expected from a catalog mailing." She attributes her success to the "unique market niche; professionals who find online shopping time-efficient; and the She Sails site features photos of average-looking women, not glamorous models."

L.L Bean also went online in 1995. "The Web gives us an extremely cost-effective way to disseminate information," said Dale Moore, former director of new-media technologies at L.L. Bean.

Jason and Matthew Olim founded CDNOW Inc. in their parents' Ambler, Pa., basement. Jason was a jazz fan who could not find jazz albums and thought an online store with every jazz album in United States and 20,000 imports would be profitable.

Shoppers place orders, and Olim contacts distributors that deliver in 24 hours. Including advertising revenues, they made $6 million in 1996 sales with an 18-percent operating margin.

Peter Ellis owns Auto-By-Tel that sells names of prospecive buyers to auto dealers. Ellis charges a monthly subscription fee of $250 to $1,500 to get names of Web surfers who check the site for a "no-haggle" price. Ellis said he made profits of $6.5 million in 1996.

Amazon, the most popular book store on the Net, provides more than 1 billion books and discounts best sellers up to 30 percent. Amazon founder Jeff Bezos has authors post comments about their books, and readers are encouraged to post reviews. Customers also fill out a profile and are alerted by e-mail of books about favorite subjects or authors. Sales have increased 34 percent a month and 44 percent from repeat customers. Bezos said annual sales are estimated at $17 million.

Eastern Meat Farms has an online site that sells sausage and semolina breads from a New York City Franklin Square Italian market. The owners do about $8,000 worth of business a month online. Monthly Web costs include $1,800 for the Internet service provider. When customers place orders, the store sends confirmations via e-mail. Each box is surrounded by styrofoam and ice packs. The owners might include free gifts of balsamic vinegar and Italian cookies.

"We talk to people all over the world now. We get thank-you cards. I like it. It's the future," said co-owner Lodico. Another advertising method is to "swap links" or exchange links on Web sites.

According to Working Woman, one major concern of online businesses is providing secure financial transactions. Visa and Mastercard are planning to standardize their credit card programs and AT&T will insure its Universal card holders from unauthorized online charges.

There is debate about the payment for online products. One possibility is placing orders only by 800 numbers. According to Marketing News, cash is "obviously unsuitable for such sales because currency can't be physically exchanged ... Checks are troublesome because customers may not follow through ... Even credit cards present problems. The public's concern about the security of their credit card numbers during Internet transmissions have prompted the development of secured encryption channels." Federal law has a $50 liability limit for credit card holders who are victims of credit card fraud.

Purchases less than $10 are unprofitable for vendors. Set-up fees, authorization costs, risk of fraud and percentage of each sale paid to credit card company makes $10 the minimum purchase needed for a profit. CyberCash and DigiCash address this currency-exchange dilemma. Cybercash uses Cybercoins or electronic money. To make a Cybercoin transaction, the customer electronically transfers a "digital wallet" to the vendor who uses a software extraction method to remove the purchase amount. The customer's money remains in an interest-bearing bank account between transactions.

Digicash uses 64-bit electronic code that represents its "e-cash." The buyer passes the code electronically to a vendor who verifies the code at an online bank before accepting the payment. This is truly an anonymous transaction system. "Smart cards" can be used for regular purchases in stores.

Mondex is Europe's most popular smart-card vendor. These smart cards have microchips that record the value of the transaction, but they cannot be used in "the real world" like DigiCash. These cards offer direct transfer of electronic cash between individuals. However, buyers will have to buy card readers for their computers to use the cards for Internet purchases which costs an additional $20 to $30 for installation.

AT&T announced plans to introduce Mondex into Internet commerce. Mastercard has the controlling interest in Mondex. Digital Equipment's Millicent micropayment system has such low transaction costs that sales of "even one-tenth of a cent become feasible. However, this low cost comes at the expense of security and convenience." Each Millicent vendor makes its own electronic currency that brokers resell to consumers. The currency is called "scrip," and each vendor redeems the scrip once or twice a month. Vendors have low transaction costs, but they pay for the transactions between redemption periods. Scrip currency is cheap but has to stored.

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