Posted: November 26th, 2013
Pets.com was founded in August 1998 as an online-retail store whose main business was the sale of pet supplies and accessories. In early1999, the company was bought out by Hummer Winblad, which is a leading venture capital company and Julie Wainwright, a leading executive. This was followed by intensive advertising campaigns in several media, in many cities across the U.S. The company was projected to be successful as it had a sound capital base, quality management and did not have any strong competition; it was even listed in the stock exchange, thus indicating that it was a strong solid company. However, it failed and in November 2000, just over two years since it was began, the company ceased operating and closed down. This paper is going to analyze why and how Pets.com failed, the results of its failure and the lessons that stakeholders can learn from it.
Discussion: Causes and Results of Failure
Pets.com began its operations on a very high note with huge amounts of funding from venture capitalists and a team of distinguished executives who had very high expectations of the company. The management and board of the company may have been too confident in their abilities and the potential of the company; this is evidenced by the fact that they failed to carry out a thorough market research and did not have a solid business plan to follow. The basic assumption was that the company would grow first enough to earn returns on the large amounts of capital invested (Guglieimo, 2011). The company also went public too soon, before it could even establish itself properly in the market. Therefore, the shares did not perform as well as it had been expected because the public were not yet sure of how the company would perform in the long-term, or in case of a crisis.
Pets.com failed chiefly because it had no controls on its expenditure; its earnings were far less than its spending. For a young company, it invested too heavily on its infrastructure, an example of which was its nationwide warehouses, which took up a lot of the company’s capital. At the time of closure, in order to meet the breakeven point, an estimated $300 million was required, which would have taken almost five years to earn. Another reason for its failure is that the concept of online shopping was not fully developed yet, therefore it did not have the number of customers it needed in order to stay afloat. It also lacked sufficient capital; a situation that was compounded by the fact that its share price had dipped from $11 to $0.20 at the time of closure. This shows that its shareholders had lost confidence in the company.
Another reason for Pets.com failure was that before start up, it did not carry out a comprehensive market research, hence leading to inadequacy of its business plan (Wolverton, 2011). The company’s business plan failed to outline the strategies that it would use to gain market dominance, hence resulting on an over reliance on advertising as a means of marketing. Its advertising budget was too high, considering that the profit margins on the company’s products were only 2% to 4%. Between February and September 1999, the company is reported to have spent $12 million on advertising, and earned revenues of $619,000. The company’s expenses were too high compared to its revenues. In order to break even therefore, the company needed a very large customer base, which they lacked because e-commerce was not yet as popular then as it is now.
The company also failed because it sold its goods at very low prices in order to remain competitive. Despite the low prices of its products, the company still had to meet the delivery and shipping costs for its customers, hence resulting in very low profit margins and in some cases, loss. The management and board of the company projected over-optimistic sales forecasts, because they had not carried out sufficient research on the pet market trends. Thus, the actual sales fell far below the company’s expectations. Pets.com failure can also be attributed to the fact that it did not have a strategy for preventing or reducing risks (Wolverton, 2011). The company also failed to consider that customers who owned pets wanted convenience, which Pets.com might not be able to provide. For instance, it did not make sense for a dog-owner to buy dog food online and wait for days for it to be delivered while he could easily buy dog-food at his neighborhood. Thus, by not differentiating itself from its competitors, the company’s customers had no real reason as to why they would ignore other pet stores and shop exclusively at Pets.com.
In addition to this Pets.com faced strong competition from other virtual pet stores such as Petsmart.com, Petplanet.com and Petopia.com (Haig, 189). This stiff competition is one of the main reasons why the company was selling its products at a lower price than the purchase cost. Therefore, even when there was a surge in sales, it only increased the losses the company was making, and thus increasing its downfall. By the time the company was closing, it had reached a point where nothing could return it to profitability. By being too ambitious and too optimistic, the company had caused its own downfall.
Most of the companies failures can also be attributed to its risk-seeking attitude; whereby decisions were made without investigating their real cost or consequences. For instance, the company quickly depleted its capital base, because it expected that sales would increase rapidly enough for the company to be profitable. In addition to this, the company began without determining whether there was a real demand for the pet products in the market. The company also sold its products at a third of the purchase costs in order to remain competitive, thus leading to massive losses. Irrational and hasty decisions such as these led to the company’s failure.
Pets.com’s failure came as a surprise to many, because on the surface, it appeared to be a stable company. It had a strong domain name, sound capital base, good management, persuasive advertisements and excellent branding. In addition to this, it had acquired Petstore.com and was listed in NASDAQ, which is a well-known stock exchange (Guglieimo, 2011). However, one of the most critical mistakes it made was failing to plan. This failure would probably have been averted if the management and directors of the company had done sufficient research and planning before introducing the product to the market. The company should have analyzed the pet products market carefully first, and more so, the viability of a pet products e-tailer. Pets.com made the mistake of assuming that by advertising only they could build up market demand. They spent over $ 20 million on advertising, but instead of working to their sole advantage, it benefitted even their competitors.
Pets.com should have formulated a strategic marketing plan where they should have targeted a specific niche market and positioned the product in such a way that it would be of value to that market segment. For instance, it should have targeted wholesalers and retailers, who do not mind bearing the shipping costs because they buy their products in bulk. Buy targeting this market segment; they would also have avoided heavy competition, because at the time there were no online-stores that focused on retailers and wholesalers. In addition to this, Pets.com should have devised a way of promoting their products that did not involve incurring huge advertising expenditure.
This might include sending online-brochures to customers in the particular segment or offering introductory promotions and discounts. Pets.com made the mistake of launching their products into the market without first establishing who their customers would be and how they would position themselves. Therefore, in future, if Pets.com reemerges, they should analyze the market, select a suitable market segment, develop a product for this segment and then market the product (Guglieimo, 2011).
Should they reemerge, Pets.com should also avoid depleting their capital base before they are able to establish steady revenues from sales. In 1999, Pets.com was granted a large start-up capital by Hummer Winblad, and this may very well have been the cause of its problems and subsequent failure. Given a second chance, Pets.com should control its expenditure and work towards increasing its profitability as opposed to focusing solely on increasing its market share. The company should learn from their failure that excessive advertising does not by itself make the market like the product. The market prefers a product that offers value and convenience; and hence, the company should focus on delivering these two elements. Advertising a product excessively is harmful to the company in two ways; firstly, it uses up too much of the company’s capital which may affect the company’s cash flow significantly. Secondly, it may lead to a situation where the product loses its appeal since the market has become too familiar with it. Thus, eventually the market may know a lot about the product but are not interested in it. This appears to have been the case with Pets.com; the advertisements were wildly popular with the public but this did not result in an increase in the market share.
Pets.com could also have avoided this problem by avoiding realistic expectations; which led to its overexpansion. The company had built warehouses in different locations around the U.S., with the expectation that the demand for their products would be massive. The pet product industry has relatively low margins; therefore, it is unrealistic to expect that profits will soar without a large customer base. Therefore, the company should have begun at a relatively lower level, in order to build its base gradually and hence develop quality market experience. If Pets.com reemerges in future, it should keep its expectations realistic and achievable, and avoid expanding without first establishing a solid customer base.
Guglieimo, Connie. Category killer – Pets.com. May 31st 1999. Web. March 1st 2011. http://www.interactive-week.com.
Haig, Matt. Brand failures: the truth about the 100 biggest branding mistakes of all time. London, UK: Kogan. 2005. Print.
Wolverton, Troy. Pets.com latest high-profile dot-com disaster. November 7th 2000. Web. March 1st 2011. http://news.cnet.com/2100-1017-248230.html.
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