6 eretail Lessons from Quixtar's $1 Billion Online Sales

On a good day, Michigan-based Quixtar Inc. does $10 million in
online retail sales. Launched less than four years ago, they're
set to break $1 billion in revenues in 2003.

That's eBay territory.

But you'll find little coverage of this success in the mainstream
media, even though Quixtar's partnered with top brands like IBM,
Sony, OfficeMax and KB Toys. Why?

Well, Quixtar's part of the Alticor group of companies, which
includes Amway. (Cue raised eyebrows.) And "mainstream" marketers
don't like to talk about network marketing. But wherever you
stand on the network marketing issue itself, $1 billion is a heck
of a lot of online sales.

So how does Quixtar explain its growth, and are there any lessons
for "traditional" etailers? We spoke to John Parker - Quixtar's
VP of Sales and Marketing - to find out:


-> Quick backgrounder: Quixtar's IBO-based marketing model

Parker says Quixtar's basic business model is a hybrid combining
the best of network marketing with the best of e-commerce,
producing what he calls i-commerce, "the convergence of the
Internet, the individual, the infrastructure of Quixtar and
Independent Business Owners (IBOs)."

The IBO's role is to get people to sign-up at the Quixtar e-
commerce site and place orders online. And they also persuade
others to themselves become IBOs in the traditional network
marketing model. Each IBO gets a cut of any purchase from one of
their customers or downline, with various bonuses for top
performers (IBOs also pay a fee to participate in the system).

The difference is that the traditional model involves a flow of
products, bonuses and information down through a chain of
distributors. Quixtar's turned that around online by using the
Internet to allow every IBO and customer to transact and interact
directly with the company through the Quixtar online store(s) and
website.

Parker explains, "it makes it a more efficient operation for
everyone involved. It creates a better customer experience, more
efficiency for the IBO and a higher level of service for everyone."

In addition, Quixtar's chosen not to focus on the same products
as Amway, preferring to specialize on health and beauty, for
example, rather than homecare.

Then on top of that, the online model and refocused product range
means that Quixtar attracts a different type of IBO than their
offline sister company (more on that later).

Parker says the result is, "business is incremental...we have
different people, different products and a different model
through which the business works."


-> Lesson #1 Personal relationships build online sales

Parker admits, "Back in 1999 I had conversations with peers at
other companies who thought we just didn't get it, that the whole
Internet thing is about disintermediation and eliminating people
like IBOs."

But he argues that building a brand and long-term customer
relationships is about trust, adding, "A website can only go so
far in doing that. Mass media advertising can only go so far in
doing that. Any company that's going to succeed in this space has
to find a way to create a dialog, an interaction on a 1-on-1
basis with customers."

That's where the IBOs come in, who drive business through
personal "human" contact with customers and other IBOs.

Parker says, "our business works because IBOs take the initiative
to go out and build the business and create the opportunity. Their
cumulative success across all the IBOs results in Quixtar
as a company succeeding. We're comfortable taking a back seat to
them."

In fact, the need for the personal touch has been the downfall of
many IBOs.

Parker notes that - especially during the 1999 Internet boom - a
proportion of sign-ups came in expecting they could just pass out
a web address and sit back and build a business.

He says, "Although we're an e-commerce business, the human
interaction delivered by the IBO is the strategic advantage that
makes us succeed while other e-commerce sites have failed."

He adds, "We were laughed at quite frankly by a lot of other e-
commerce companies. Today a lot of them are out of business."


-> Lesson #2 Don't compete with your affiliates

The IBO model has similarities with the affiliate marketing
approach. But most affiliate marketers treat their affiliates as
just another marketing vehicle - one way of acquiring new
customers cheaply.

Quixtar's supposition is that the personal approach of IBOs can
do a better job of nurturing and retaining customers than a
website. So the company treats IBOs not as one sales channel, but
as the only sales channel; the money other companies might use
for ad buys gets spent on IBO support.

Since the trust relationship between Quixtar and the IBOs
determines the success of that approach, keeping the relationship
strong is paramount to Parker's endeavors.

For example, it's impossible for any customer to buy a product at
Quixtar without the sale being credited to an IBO. Purchasers
must manually reference a referring IBO when they first open a
shopping account.

At a stroke, this eliminates many of the common complaints you
hear from traditional affiliates regarding issues like cookie
return days, parasiteware, transaction recording problems etc.

Parker says, "long-term, supporting IBOs will provide a more
successful business model for Quixtar and for them. If we go
around them, or undercut them in any way, all that does is hurt
our total business."

He notes they have several hundred thousand IBOs, and paid out
over $655 million in bonuses and incentives up to the end of
2002.


-> Lesson #3: Give affiliates significant marketing support

Parker says, "what we're doing every day are developing more
effective ways to support IBOs, because it's not until they're
effective in their own independent businesses that we're
successful as a company."

Again, Parker's idea of partner support goes way beyond the
typical arrangement you might find in a merchant-affiliate
relationship. Quixtar provides IBOs with, for example,...

a. A virtual office at the Quixtar site, where they can access
CRM tools to track sales made by "their" IBOs and
customers. Records are sortable using various criteria
(e.g. people who haven't ordered goods for more than 30
days), to help IBOs better target their own marketing
efforts. They can also send electronic postcards from this
virtual office.

Parker notes that customers must give their permission
before purchase data is revealed to their IBO, but observes
that "the experience has been that customers are
comfortable with their IBO having this kind of information
because the IBO is part of that sale."

b. Sales information and catalogues for different product
categories and individual products, so IBOs are better
positioned to guide purchase decisions

c. Call center help

d. Videos, CDRoms, DVDs, downloadable MP3s, online content and
emails covering both business and product issues.

Also, Quixtar itself occasionally sends opt-in promotional offers
via email to customers, but always ensures the referring IBO is
aware of any such communication.

Parker says, "If a customer's expressed an interest in skin care
products and we send out an email, we feel strongly that the
effectiveness of that communication will be magnified 10 fold by
the involvement of the IBO. To have a real dialog and get the
individual needs of that consumer - no one can do it more
effectively than an IBO."


-> Lesson #4 Protect the brand with email rules & regs

Network marketers don't exactly have a great reputation when it
comes to obeying the rules of permission-only email.

Parker understands that junk email would be a sure way to kill
the trust that underpins the Quixtar business model. But he
admits that some IBOs do send junk, sometimes knowingly,
sometimes through ignorance. To minimize occurrences, Parker
takes two routes to junk control.

The first is a zero tolerance policy on spamming.

He says, "we've suspended or terminated thousands of IBOs for
violation of our rules specific to spamming. We take a very
aggressive proactive approach...one offence and you're
suspended," (though IBOs can appeal the decision.)

The second is prevention through IBO education. Junk policies are
posted prominently in the support materials available to IBOs.

"Most importantly," he adds, "we have IBO leaders teaching people
that you're not going to build a successful business with Quixtar
by sending out a lot of spam, you're just going to ruin the
business for everyone."


-> Lesson #5 Expect surprises and adapt to them

First surprise: Parker says, "our intention was that we would be
ecommerce only - there would be no paperwork to support the
business. No catalogs, no literature. Then we found out IBOs
needed both to support an ecommerce business. We had to adjust
our thinking to what the marketplace needed."

The demographics of IBOs also surprised Quixtar. The typical
Amway distributor in the USA is in their late 40s. The median age
of IBOs at Quixtar is 33, and around half of those getting into
the business today are under 30.

As a result, Quixtar changed product selection, sourcing and
support materials to focus on a younger audience.

Parker says, "the younger IBOs may have less experience in a
classical business setting but often times that plays to their
benefit...older people have sometimes gotten themselves into a
mindset that's a little more corporate and a little less
entrepreneurial."


-> Lesson #6 Lever your strengths for new income streams

The human element allows Quixtar to succeed with income streams
other e-commerce sites have struggled to exploit.

Parker cites Quixtar's Ditto Delivery program as an example. It's
an auto-replenishment program, where a customer or IBO can have
consumable products (like toothpaste or vitamins) delivered on a
regular basis, at a frequency they set.

Parker says, "If you sit down and hand over your credit card to a
faceless website, to send you product on a regular basis, that's
a little bit of a daunting, uncomfortable issue...there's not
that level of trust. With us, with the IBO as part of the
process, the trust is higher."

He adds, "IBOs can help customers with the frequency. The IBO
knows you want to start people slow - you don't want to have
product arriving prior to the other product being used up.
Building that kind of trust has been hugely successful."


-> End note: It's not about tech - it's about people

Parker reiterates, "Technology isn't a business model. It's just
a tool we use to power our business model. The trust comes from
human interaction."

And he notes wryly, "A lot of the companies that originally
laughed at us are now interested in being partner stores."