Page 51 - Electronic Commerce

Chapter 1

26 LEARNING FROM FAILURES

Pets.com
In February 1999, Pets.com launched its Web site with the hopes of making substantial
sales to the 60 percent of U.S. households that own pets and spend more than $20 billion
each year feeding, entertaining, and caring for them. More than 10,000 stores sold pet
supplies. These stores included small retail outlets, grocery stores, discount retailers
(such as Walmart and Costco), and a new generation of pet superstores. Pets.com had
acquired an excellent domain name and intended to exploit the opportunities presented
by high levels of investor interest in funding electronic commerce companies. The plan
for Pets.com was to spend heavily to develop a brand and a Web presence that would
rapidly make the company the premier online source for pet-related products.
After launching the site, Pets.com raised $110 million from private investors in
1999, and another $80 million in a public sale of stock in early 2000. Pets.com spent
more than $100 million of the money on advertising during its short life. It also spent
significant sums to create a Web store that offered more than 12,000 different products.
In November 2000—less than two years after launching its Web site—Pets.com went out
of business.
Pets.com had created an electronic commerce initiative in an industry in which
online business offered few advantages over traditional commerce. The products had a
very low value-to-weight ratio. The shipping costs for pet food, one of the company’s
best-selling product categories, caused it to lose money on every sale. Pet products come
in all shapes, sizes, and weights, and are, therefore, difficult to pack and ship efficiently.
Pets.com was also spending money rapidly at a time when investors were beginning to
question the long-run viability of all electronic commerce businesses. The lesson here is
that Pets.com could not develop any sustainable advantage over traditional pet stores.
Without such an advantage, the business was doomed.
In the years following the Pets.com failure, a number of companies such as PETCO
and PetFoodDirect.com began selling pet food and related items online. These compa-
nies were more careful than Pets.com was about what they offered for sale. By selling
only items that had an appropriate shipping profile, many of these companies have now
become successful. For example, veterinarians who formulate foods that meet the needs
of specific pet diets are finding they can charge enough for those products to make
online sales profitable.

ECONOMIC F ORCES AND ELECTRONI C
COMMERCE
Economics is the study of how people allocate scarce resources. One important way that
people allocate resources is through commerce (the other major way is through
government actions, such as taxes or subsidies). Many economists are interested in how
people organize their commerce activities. One way people do this is to participate in
markets. Economists use a formal definition of market that includes two conditions: first,
that the potential sellers of a good come into contact with potential buyers, and second,
that a medium of exchange is available. This medium of exchange can be currency or

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