It was with noticeable pride that Jon Nordmark, founder and CEO of eBags.com this week reported to attendees of the eTail 2002 Conference in San Jose that his web site, which offers a wide assortment of suitcases and other travel bags, made its first profit last December and continued running profitably in January, thanks to a 65% year-over-year sales gain. Launched two-and-a-half years ago in the midst of the dot-com boom, eBags had raised $30 million in start-up funding, rapidly built up a staff of 100, and started investing heavily in advertising, following the same initial path taken by dozens of other entrepreneurial web merchants.
When the losses kept mounting, Nordmark did what other pure-plays did-sought additional funding. “I was looking for $15 million of additional funding after we raised the first $30 million,” he recalled. “Thank God I didn’t find it, because when you don’t have a lot of money to spend on new things, you have to test everything before you go forward.” Being denied on the second round of funding, Nordmark said, was what put eBags on a path toward profitability, while other dot-coms who succeeded in raising additional capital simply kept doing the same things as before to lose it. Conversely, he said, “We didn’t get caught up in the spending frenzy, and we went on to created a culture of testing. As a result, we beat the dot bomb, the recession and the terrorists.”
As Nordmark describes it, eBags simply kept testing until it found what worked. When off-line advertising failed to build traffic to its site, it eliminated advertising, slashing its marketing budget 67% in the fall of 2000. It turned instead to e-mail marketing as the prime promotional vehicle. And it tested e-mail promotions incessantly before implementing them, measuring the results of as many as eight different e-mails at a time. It even developed and tested two entirely different web site designs.
And it looked for every opportunity to cut costs. “We spent $700,000 on photography for the web site in our first year of operation,” Nordmark noted. “We decided to bring all product photography in-house, and we cut that budget by 90%.” The company cut consulting expenses, started delivering all e-mail from an in-house server and made certain custom software enhancements using its internal developers, who could do the work more cheaply. It also trimmed its purchases of expensive web gadgetry. “We don’t use any flash technology, because we want to keep the site simple,” said Normark. “The web is all about speed.”
The company also focused on converting high fixed costs to variable costs, where possible. Hence, it began negotiating marketing arrangements based on a fee-for-performance rather than a fixed fee. That helped it cut marketing another 85% in the first half of last year, after it achieved its first cut by trimming advertising.
eBags also made the difficult choices on staffing and compensation in order to put a premium on survival. In early December 2000, just prior to the company’s Christmas party, it trimmed its 100-person staff by 25. Three additional layoffs in the next four months cut another 25 from the workforce. But it was how it chose those to be laid off that made the difference. Rather than following seniority or the pressures of internal politics, it laid off workers based on their attitude. Those who believed strongly in the company’s mission and were willing to make personal sacrifices to keep it going stayed. Those who were looking to collect a paycheck were let go, no matter what their level of expertise. “We want to hire people who are missionaries, not mercenaries, people who want to build things,” Nordmark said. Far from crippling morale, Nordmark said, the layoffs not only improved the cost structure of the company, but improved morale as well, because “we let go of those people who didn’t have the attitude we want.”
The result of all of these cuts has given remarkable support to the notion that when it comes to Internet retailing, less can indeed mean more. In the last two years, eBags has cut costs by 65% while increasing sales by up to 135%. Marketing costs went from 100% of revenues two years ago to just 10% of sales today. Revenues per employee have soared to nearly $500,000; fulfillment and customer service costs have dropped to a mere 2% of sales. Gross margins have increased 12 percentage points in 30 months, and returns have dropped from 7% of sales to 5.5% And last year, the company shipped 1.3 million bags with an 8.8 BizRate rating.
As if to prove that he, too, has the survivor’s attitude, Nordmark told his audience that he was the 10th lowest paid person at eBags and that while attending the conference he was staying at the Holiday Inn and not at the upscale Fairmont, where the conference was held. “It’s the only way you can hold the respect of your people and deliver the results that we have been able to deliver,” he said.