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E-commerce Start-up Business Plan

Market Analysis Summary

Based on publicly available survey data, the average rate of online returns is 9%, meaning that in 2000 alone the value of returned merchandise will be more than $1.5 billion. The company generates revenues by utilizing a dual-pricing approach. First, it charges online merchants a flat fee for the program, which averages only 0.5% of a given merchant's total sales. Secondly, charges merchants a low flat 8% rate on every item's listed price that has been claimed through its website. The pricing structure reflects the benefits of the easy and trouble-free return process for consumers, restored customer satisfaction, selling opportunities created during the claim process, and all repeat sales thereafter. The program is estimated to cost merchants less than 1.5% of their total revenues, whereas it will increase sales to merchants by at least 15%.

6.1 Service Description

The service positioning in the eyes of online merchants is imperative to the success of the enterprise. The service proposed by the company is a business-to-business solution offered to online merchants of physical, non-perishable products. However, because online consumers will deal directly with the company via its website, the proposed solution also incorporates some features of a business-to-consumer service. It is therefore of utmost importance to clearly define what this company offers is a customer service & customer satisfaction program for online merchants. The most unique feature is that the proposed company takes the systemic problem of product returns and turns it into new selling opportunities for online merchants.

It is also important to note that does not try to position itself as a competitor to any incumbents with a similar service, online merchants, or shipping companies. The proposed company strives to position itself as a strategic partner to all parties participating in handling product returns. If nothing else, should be viewed as an outsourcing company to online merchants with the core competency and focus in handling returned merchandise.

The service offered by is designed to enhance customer retention and loyalty by offering an easy and trouble-free merchandise return process to online shoppers. According to Jupiter Communications, the goal of the 1999 holiday season was not about generating impressive sales, but rather securing long-term relationships. Retailers now need to focus on retention and loyalty. will help to achieve just that through establishing lasting, productive relationships with online merchants. Providing an easy, uniform, and trouble-free return process to all online shoppers will enhance the overall image of online merchants. While the number of retailers continues to grow, consumers will not have to look up every single one to find out about return policies and later keep abreast for possible changes. A centralized Internet location--the company's website--will retrieve, summarize, and present the appropriate policies. Based on product information, it will make sure the correct procedures are used. The company's banner with a notation "For an Easy, Trouble-Free Product Return Click Here" will be placed visibly on retailers' websites and will serve as a symbol of customer orientation and care.

Moreover, the shipping process will be streamlined. Customers will be able to generate a shipping label on the company's website thus reducing the hassle at the shipper's counter. Although some online retailers already supply pre-printed shipping labels for sold items, customers sometimes lose, or throw away, those labels when they first see and like the products they ordered. Shortly after they may change their mind and would like to return a particular item, but the label is gone. With the proposed program, the label is always available online so that consumers can have peace of mind and also reduce the amount of documents they need to keep just in case. The service therefore offers a dual benefit to consumers. The retailers may then choose to stop including a pre-printed return label with every outgoing shipment thus reducing costs of selling. From a shipping company's perspective, the shipping process is streamlined because the online-generated label will have all the necessary information, possibly including a tracking number if it is going to be shipped by UPS. That way consumers do not have to spend time at UPS counters filling out forms--both a customer service and operations improvement for UPS. will be a strategic merger between online merchants, carriers, and their partners targeted at overall improvement of customer satisfaction and ultimately the bottom line of merchants.

Another important feature of is that shipping of returned merchandise should be free of charge to consumers. (Means of achieving it are discussed in more detail in the Pricing and Revenue Generation section.) This differentiating feature will tremendously increase the consumer acceptance factor of the proposed service. The fact that products purchased online can be returned in an easy and trouble-free way, and that shipping is also free, will help expand the entire online shopping industry. The added convenience and peace of mind consumers will gain with will translate into more shopping with those online merchants that participate in the program.

When customers go through the sequence of online entries on the company's website, the retailer whose product is being claimed for return will be offered at least one selling opportunity. At the end of the sequence the retailer will be able to target the consumer with any new sales offers as its website will appear onscreen. Should an exchange or replacement be preferred by the customer during the online return process, the retailer will receive an additional selling opportunity as its website will appear with offers during that step. These opportunities will translate into more sales for retailers. This will also stimulate customer retention, which means repeat sales. All in all, the program will increase customer satisfaction and generate more sales.

The program has a number of unique features. First, it alerts the retailer that a particular customer is claiming a particular product for return as it happens. That way the retailer knows about it as it occurs and not when the merchandise arrives at its warehouse. This allows to plan ahead. Since 9% of all products are returned, this feature offers useful information to better handle logistics and inventory.

Secondly, and more importantly, by asking consumers during the online sequence why they want to return a particular item merchants gain an invaluable piece of information. If the reason for return is defective product (30% of all reported returns), the retailer can save the sale and turn an unhappy customer into a delighted one by sending a new item right away. If the reason for return is wrong color, wrong size, or wrong product altogether (28% of all reported returns), the retailer may choose to send the correct product right then, thus instantly restoring customer satisfaction and saving a bad sale. It will be up to the retailer to decide on payment and credit terms of the exchange. These benefits ultimately translate into increased customer retention, reduced costs, more sales, and improved bottom line.

It is estimated that the program will generate an average sales increase for merchants of at least 15%. Online shopping is still at the early stage of consumer adoption. As stated earlier, about half the people who have not shopped online cited the cost and hassle of returns as a significant factor for not shopping online. Another recent survey found that 89% of online buyers said that return policies influenced their decision to shop with an online retailer. Consumers demand not only convenience but peace of mind. The proposed program offers both and it should increase the number of online shoppers, thus causing a market expansion for online merchants. The first retailers who implement the proposed program will also be able to differentiate themselves and capture a larger market share in their respective segments. Once embraced by the majority of online merchants, the program will become an industry standard.

It is important to note that during the entire process the company will not ask for, or try to gain access to, consumers' credit card numbers. This will significantly limit possible liabilities and security/confidentiality concerns.

6.2 Promotion, Sales, and Marketing

Promotion of the service will be executed through both push and pull strategies. The push strategy will call for the use of direct sales force and industrial marketing to introduce the service to online merchants. Once success has been achieved in the push strategy, the pull strategy will utilize a large-scale advertising campaign to further build up consumer demand.

Push Strategy

Because the company's service is a business-to-business program, it will be initially promoted to online merchants by direct sales force. Personal selling will be necessary to reach decision makers within online organizations. At first, contacts will be made with Internet service providers, such as America Online, that host online stores and shops. America Online claims to have 20% of the total Internet service provider market in the U.S. Therefore, arranging a strategic partnership where becomes the preferred or exclusive choice for all returned merchandise bought at shops will be invaluable for establishing a well-recognized brand and building up entry barriers for any possible competition. Ideally, a company's banner with a notation "For an Easy, Trouble-Free Product Return Click Here" will be visibly displayed throughout the shopping section of Portals such as Yahoo! will be approached as well. Reportedly, Yahoo! hosts nearly 6,000 merchants where it charges each merchant at least $100 to $300 per month. Arranging a strategic partnership with Yahoo! will provide a strong leverage in negotiating return contracts with individual merchants. Similar to that of America Online, the company's banner will be displayed throughout the entire shopping section of Yahoo!

Large online merchants such as and will be targeted by the direct sales force during the first stage as well. Those companies have already achieved significant volumes of sales--and therefore product returns--and will find the uniform return process of much benefit to them. Strong "category killers" such as eToys and CDnow are also first sales targets. Auction houses such as and will be approached with a service offer for products sold to consumers by merchants and direct manufacturers.

Wherever possible, smaller online retailers will be personally approached by the sales force. To stimulate awareness and service penetration among smaller players, industrial marketing techniques will be utilized. Those will include advertising in specialized publications such as Internet World and Red Herring, as well as referral fees for retailers who already use the service. Email campaigns will be used to reach decision makers at smaller companies. The email messages will have an invitation to the website where a specially designed presentation will explain the benefits of the new service. An invitation to be contacted by a service consultant to discuss details will be included.

The company plans to offer its services right before Thanksgiving 2000. In order to stimulate a quicker adoption of the services, the remainder of the year 2000 will be offered free of charge.

Sales Structure and Customer Approach

It is estimated that the initial expenses to hire a sales force and a customer service unit of up to five people during the first year will be close to $400,000. Another $200,000 will be needed for sales program development, marketing activities, and training (excludes advertising). The initial compensation package for sales force will include a nominal base salary and a progressive commission structure. This should ensure that during the early stage of the company's growth not only that sales targets are met, but also that customer (customer here means merchant) satisfaction and retention are fully addressed. The sales force will initially be located at the corporate headquarters. A territorial approach will later be implemented, with sales people located in regions. After one year, sales force members will split into two distinct groups. The first group will include pure sales people, the "go-getters" who will be placed in regions and will work on pure commissions. The commission structure will become more progressive and rewarding for such individuals, including a bonus structure. The estimate for an average commission paid on sales is approximately 5-10%. The second group will include client care professionals who will concentrate on customer satisfaction and retention to ensure the continuity of the program. These individuals will remain at the headquarters and will have a base salary with a bonus structure. The base salary for client care professionals is in the mid-five figures. Industrial advertising and promotional expenses in 2000 are estimated at $250,000.

It is also a possibility to sell the services to merchants via the Internet hosting service providers, portals, and software developers. Those companies will then serve as distributors and agents, compensated on commissions. This approach will eliminate the need for a large sales force. The final layout will depend on how quickly agreements with companies such as America Online and are negotiated, how aggressively they will be able to promote the services, and on what conditions.

The following diagram describes the customer approach (customer here means merchant).

Service consultants are the direct sales force that approaches prospective customers with service offers. Once a customer has been signed, a service consultant will only approach the client with new service offers and product upgrades. A client care professional is then assigned to each customer to deal with all customer service issues. Each customer will be advised to direct all service inquiries to the professional. A professional will also proactively call on customers to ensure high quality of service and customer satisfaction. The consultants and professionals will have direct communication lines between themselves to ensure open information exchange and a quick and efficient problem-resolution culture. This structure will guarantee an aggressive sales approach, client-oriented service, and efficient post-sales support.

Pull Strategy

It is important to gain critical mass in the number of signed retailers before a nation-wide advertising campaign targeted at consumers can start. Once major retailers have been signed and awareness achieved among the overall online merchant community about, the company plans to roll out a nationwide TV advertising campaign. The campaign may start as early as the first quarter of 2001; however, the timing will depend on how quickly gains market share. The campaign should prompt consumers to make sure that online retailers they buy from have the service. Participating merchants will have the company's banner with a notation "For an Easy, Trouble-Free Return Click Here" visibly displayed on their websites. The banner later will become the symbol of customer orientation. Successfully executed, the TV ad campaign will prompt consumers to ask their merchants for the Easy and Trouble-Free Return process. This, in turn, will prompt online merchants to call on the company. The demand from the merchants will then be "pulled." The estimated budget for the TV campaign in 2001 is up to $5 million, all internally generated. However, the amount can be reduced if the preceding industrial marketing campaign achieves the key goals. Once the objectives of service awareness and acceptance have been achieved, subsequent marketing budgets will be used to build up and protect the brand. This will include print, radio, and TV.

6.3 Distribution and Information Structure

The service will be made available to consumers via the Internet. The company will maintain a website with its Easy and Trouble-Free Return procedure. The domain name will underscore the ease and convenience of the merchandise return process. (The name may not be the final choice.) Also, company's banners will be placed on participating merchants' websites, most likely under return policies sections, so that consumers could access the service directly from online stores. will then be effectively incorporated into the customer service of participating merchants as an outsourcing partner that specializes in product returns.

Consumers who do not have access to the Internet but want to return e-gifts received from friends or relatives will be provided with a toll-free telephone number. Telephone operators, with access to the Internet, will follow the same exact set of onscreen entries. They will relay options and procedures to the consumers over the phone. The shipping sequence will remain the same. Ideally, the toll-free numbers should be operated by the online retailers themselves. That way they only have to make sure their operators have access to the Web. Should a customer decide to exchange gifts or make a purchase during the return process, the retailers' operators will be best suited to handle it. Another option is a consolidated toll-free telephone service provided by for a fee to retailers. Such service would be outsourced.

High-speed communication lines will be established between the company's software that registers and processes all returns and individual merchants. Every time a product is claimed for return by a consumer via the company's website, the corresponding merchant is advised on the transaction as it happens. This is an integral part of the entire program. The connection between the company and the merchants will be established via the Internet. The company's website will have a merchant login screen where a record of all returned items will be maintained. The merchants will be able to sort data by various categories and copy/paste it into other software packages such as MS Excel; the data format will be spreadsheet-friendly. The Internet connection will be secure and password protected. While the majority of communication will be via the Internet, company's client care professionals will routinely call on their counterparts to ensure that all information and service needs are fully met.

For its own database purposes, will record all transactions and details thereof. While consumers are not asked to give their home addresses during the online entry process, such information should be provided by the corresponding merchant as part of the information exchange agreement. This information will be needed for the return label to be generated online. Credit card numbers and other sensitive information will not be asked for. At the end of the online authorization process the consumer will be offered a notification email to make a record of the return. Should customer decide to have a confirmation, his or her email address will be obtained. The company may offer a membership program with a consumer login, in which case all necessary information details will be obtained. The company will also offer a "reminder service" to consumers once they have processed a return online. If the product has to be shipped back before a deadline, an email with a reminder will be sent prior to that.

6.3.1 Strategic Alliances

For shipping and handling purposes, the company will strike strategic alliances with carriers and package service providers. Most likely, UPS will be the preferred carrier of all shipments. UPS has an extensive network, excellent track record of quality, and a number of agreements with package service providers such as Mail Boxes Etc. and PostNet. Its ground shipment option appears to be the most optimal option so far, both from the quality and price standpoints. While retailers are able to negotiate discounts with carriers for outbound shipments, most consumers are forced to pay published rates on returned merchandise because each return is viewed as a single transaction. will act as a demand aggregator bundling all returns claimed through its website and will negotiate discounts with carriers. Moreover, the company will join membership organizations such as National Retail Association that provides member discounts of up to 42% on published rates with Airborne Express. All that will be utilized to eliminate the shipping costs for online shoppers, which will only speed up the company's acceptance by consumers.

Other possible strategic alliance companies include VISA, MasterCard, American Express, and large banks such as Citibank and Chase Manhattan. Credit cards are a preferred way of payment for online purchases. Since tens of billions of dollars are now spent online, credit card issuers can notably increase their revenues by partnering with A credit card issuer can offer a partial rebate of shipping charges for returned items as long as consumer paid for the items with the credit card. This may later become a standard feature similar to certain kinds of insurance built into some credit cards. Also, an issuer can cover the interim risk when a merchant sends consumer a new item or a replacement before receiving the returned item back. This offers mutual benefits to consumers and merchants, while the credit card issuer makes its cards more superior thus attracting more customers. Co-branded promotional campaigns can be designed to promote along with more established companies.

6.4 Market Segmentation

As stated in the previous section, the estimated online retail revenues for 1999 were around $25-36 billion. Both sources providing the estimates indicated that only merchants selling physical products (books, CDs, electronics, apparel, etc.) were included in the breakdown by category. No mention was made of services such as online hotel reservations, news subscriptions, or online brokerage being included in the total figures. However, it would be advisable to use a more conservative approach when estimating the total revenues of online merchandise sales. Presented below are estimates for Internet retail sales made by National Retail Federation shortly after the 1998 holiday season.

YearTotal Internet Retail Sales

6.4.1 Description of Items Sold

The next step is to identify the number of items sold. According to a Jupiter Communications press release, during the 1999 holiday season 250 million online consumers spent $7 billion. This means that an average online purchase was $28 (7 billion over 250 million). However, a single purchase may have included more than one item. A study of 1999 holiday shopping conducted by indicates that an average online shopper purchased 12 items, whereas the average purchase price was $1,613. Using these two extremes, the average price of an online item is therefore estimated at approximately $100 ((28+161)/2=94.5). Knowing the average price, the number of total items sold is easily calculated.

YearInternet Retail Sales Total Items Sold
1999$10,800,000 108,000
2000$17,000,000 170,000
2001$26,000,000 260,000
2002$40,600,000 406,000

Of all items sold, some will be returned to retailers. A study of 1998 online holiday shopping conducted by PC Data Online indicated that 9% of respondents reported returning gifts. A slightly earlier study by the same company indicated that 12.3% of all respondents were returning items. A survey of 1999 holiday shoppers conducted by Greenfield Online confirmed the first figure by indicating that 9% of shoppers planned to return an e-gift. The 9% figure is still a conservative estimate. A recent survey of the retail industry by American Express found that 46% of all respondents typically return anywhere between one and ten holiday gifts every year.

YearInternet Retail Sales Items Sold Items Returned

The table above shows that more than 15 million items will be returned to online merchants in the year 2000 alone. Total merchandise shipped back will be worth over $1.5 billion. The figures more than double in 2002. There is clearly an expanding market for a "returned merchandise" service provider.

Market Analysis
Year 1 Year 2 Year 3 Year 4 Year 5
Potential Customers Growth CAGR
Books/CD/Video 25% 48,000 60,000 75,000 93,750 117,188 25.00%
Toys/Games 40% 76,000 106,400 148,960 208,544 291,962 40.00%
Electronics 30% 65,000 84,500 109,850 142,805 185,647 30.00%
Computer 65% 90,000 148,500 245,025 404,291 667,080 65.00%
Total 45.83% 279,000 399,400 578,835 849,390 1,261,877 45.83%

6.5 Market Needs

E-commerce continues to accelerate and the amount of money spent on purchases made through the Internet shows no sign of decline. During the 1999 holiday season (November 20 to December 19), retailers saw online revenues quadruple, jumping 300% to about $11 billion and far exceeding expectations, according to a study by and Boston Consulting Group. The study of 30 retailers in such categories as apparel, books and music, home and garden, specialty foods and electronics showed a 270% growth in the number of orders. The study indicated that online sales were growing at 145% annually and it projected online retailer revenues of more than $36 billion for 1999. An earlier study conducted by Ernst & Young, before the holiday frenzy, already estimated that total revenues for online retail and consumer products for the calendar year 1999 were around $25-30 billion.

While a notable amount of positive publicity about the Internet shopping has recently appeared in the media, the number of problems encountered by online shoppers actually increased more dramatically than the sales figures. According to a poll conducted by, the number of complaints filed between November 25, 1999 and January 13, 2000 was up 404% over the same period last year. Over 62% of the respondents claimed they had experienced at least one problem with an online transaction. Misrepresentation/misinformation and delivering defective products each accounted for at least 22% of all complaints. In the breakdown of types of problems occurred, delivery of a wrong item accounted for 17.2%. These kind of problems ultimately result in product returns that cause additional costs to the consumers and both costs and lost revenues to the retailers.

Presently, not all online retailers have established simple and trouble-free return procedures. Pure e-tailers such as have no physical presence and therefore require consumers to ship back the merchandise without offering much help in the process. Even some well-known retailers such as, an extension of Best Buy, do not allow consumers to return items purchased online at their physical stores. To make things worse, the return policies are not always well displayed on retailers' websites, and customers are sometimes required an authorization prior to returning any merchandise such as in cases of and Consumers may have to read through the entire return policies, including the notorious "fine print," in order to make sure they use the right procedures and that required time frames are followed. This creates additional aggravation--on top of having to return the merchandise--which all reflects in reduced customer satisfaction. The significance of an "easy return" cannot be underestimated as about half the people who have not shopped online cited the cost and hassle of returns as a significant factor for not shopping online. Moreover, a recent survey by, an online shopping center, found that 89% of online buyers said that return policies influenced their decision to shop with an online retailer.

When a wrong, defective, or misrepresented item was delivered to a consumer, the return process often proved uneasy. According to recent findings by PC Data Online, 30% of all consumers who returned items found the return process difficult. It is apparent that existing return procedures are inadequate and sometimes irritating. The solution, however, does not lie in forcing all online retailers to establish a "no-questions-asked" return policy and to post it clearly at the top of their websites. The entire sequence a consumer has to follow, starting from looking up the procedures on the Web and then having to make a trip to UPS or the Post Office, has to be streamlined. There is clearly a need, as well as an opportunity, for a new service company to improve the overall return process for online shoppers. As a result, the consumer satisfaction will be enhanced and it will translate into increased repeat sales for online retailers.

6.6 Service Business Analysis

The "returned merchandise" market is there and it is growing. Listed below are a few major expansion opportunities for the new company.

6.6.1 New Markets

Geographic expansion will be needed in order to provide global return services for the online community. This will include both within-borders services and across-the-borders operations. A number of companies such as and eToys have already opened operations in the United Kingdom, not counting a growing local online merchant community. This in itself presents an opportunity to replicate the service in other countries for domestic online retailers. will partner with local carriers and shippers when operating there. A country-by-country approach may be utilized; however, there may be an opportunity to establish a centralized, consolidated operation within the European Union.

As across-the-borders e-commerce keeps increasing, so does the need for a global service. Of all consumer product complaints recently registered with, over 4% were about companies located outside the United States. While many domestic online retailers are limited to shipping within the U.S. only, the consumers are already buying overseas. Having to ship back overseas adds to the hassle and costs of returning a product. Once established and running in the U.S., will be best positioned to take advantage of the global trend and offer international services.

6.6.2 New Services

As more and more consumers shop online, the need to keep track of purchased products will grow. Currently, many online retailers offer an option to track a purchased item, but not always through the entire delivery process. An item itself may have an availability "window" of up to a few weeks, plus the shipping time of a few days--the customer is never quite sure when he or she will actually receive it. As more purchases are made, there will be more items to track. To do that, the customer has to look up websites of the merchants or use carriers' websites to inquire on shipping status and read through the flock of notification emails from the merchants. There is a growing need to consolidate all this information in one location for easy reference. A software that records all online purchases, tracks their status, and presents the findings to consumers in an easy-to-read format will be of much value to consumers. Having developed partnership and information exchange agreements with online merchants and shipping companies, will be well positioned to offer such tracking services to consumers.

While builds its core competency around product returns, it is also gaining the most knowledge why returns actually occur, what kind of online products are most frequently returned, by what kind of consumers, etc. The company will therefore be best positioned to advise and consult the online merchant community on how to improve operations and minimize product returns. Since product returns is a systemic problem of the retail industry and most likely it will not be totally eliminated, does not run the risk of putting itself out of business. Quite the contrary, it will secure the leadership position in that segment of consulting services and will naturally expand its core competencies of merchandise returns into advisory.

6.6.3 New Customers will not limit its services to the online merchants only. Direct-mail orders and catalogs also experience the same returned merchandise problem. Recent publications indicate that there are more than 8,500 consumer catalogs in the U.S. alone. According to the National Mail Order Association, U.S. mail order sales were a staggering $357 billion in 1998. Despite the growth in online shopping, the 1998 sales figure represented a 12% increase over 1997. Consumer product sales accounted for $109 billion of the total--roughly ten times that of the online merchandise sales for the same year. Based on a recent comment provided by the association, the rate of returned merchandise in this business is around 10-15%. Categories such as apparel may experience a return rate close to 20%. Reportedly, some large catalog houses have to maintain separate returned merchandise facilities just to handle the volume of returned products. A number of catalog companies, including Lands' End, have been aggressively embracing the Internet as a new distribution channel. While catalog business has a long history and experience in dealing with returns, there is definitely an expansion opportunity for the new company in offering its returned merchandise services to the catalogers. The service will further streamline their operations and enhance customer satisfaction.

Many department stores such as J.C. Penney and Macy's now also use the Web to sell products. Most of them allow customers to return merchandise purchased online at physical stores. This serves as a goodwill, and customer satisfaction, builder. As an add-on to that, can still offer its services to the pro-Internet shoppers who do not wish to make an extra trip to the store to only return products. The company will provide at least one selling opportunity during the online return process, which will compensate for possible purchases a customer may make while at a store. This will underscore the convenience of online shopping, improve the return procedures by preventing the returned merchandise from spreading across physical stores, and enhance the image and bottom line of "click-and-mortar" department stores.

When dealing with multi-distribution channel retailers such as Macy's department stores, Macy's catalog and Macy's Internet store, will be able to offer one returned merchandise procedure that will cover all channels. It will streamline the entire process by relieving the retailers from having multiple return facilities and extra work force to operate them.

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