Onsale: Scale, Low Acquisition Costs Key to Wholesale Computer Venture

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NEW YORK--A large customer base and low prospecting costs are why online auctioneer Onsale Inc. believes its new wholesale computer venture Onsale atCost will succeed.


Onsale, Menlo Park, CA has begun selling new personal computers and accessories at the wholesale price it pays for them. Previously, most of Onsale's business came from auctioning refurbished computer equipment and closeout PCs, consumer electronics and sporting goods.


Though Onsale reported 30 percent growth in consumer electronics and sporting goods sales from the third quarter of 1998 to the fourth quarter, the growth in those categories was offset by a seven-percent decline in computer sales because of limited availability of excess and refurbished computer goods during the main holiday season, the company said. The result was an essentially flat fourth quarter overall, ending a string of quarters of growth.


Enter Onsale atCost.


"The economics [of the new venture] lie in customer acquisition costs," said Jerry Kaplan, president and CEO of Onsale.


It costs Onsale $15 to acquire a new customer, he said adding that Onsale arrived at the figure by dividing its ad spending for the year by the number of people who placed first-time orders.


Also, less than 15 percent of Onsale's new customers are trackable to a paid source of advertising, said Kaplan. Most of the firm's new customers come from publicity and word of mouth. Kaplan declined to estimate how Onsale's acquisition costs compare to competitors' costs.


To get products for the new venture, Onsale has signed a one-year agreement with Tech Data Corp., a Clearwater, FL computer distributor with about $12 billion in revenue. Tech Data will drop-ship the merchandise.


Profits for Onsale atCost will come from transaction fees, shipping charges, ad sales, vendor cooperative selling arrangements, rebates and warranties.


Consumers will pay Onsale's wholesale cost plus shipping charges, a 2.6 percent credit card processing fee and a handling charge probably in the range of from $5 to $10.


"We negotiated a very favorable deal with Tech Data in the hopes that we'll meet their volume demands," said Kaplan..


When asked about competitors like Buy.com Inc., Kaplan said Onsale has the scale advantage.


Onsale claims it has 971,000 registered bidders, that it serves about 1.2 million page views per day and that its ad inventory was sold out during the fourth quarter of 1998. Seventy seven percent of OnSale's orders are from repeat customers, said Kaplan.


"They have to catch us. We're bigger than they are," he said. Buy.com is computer distributor Ingram Micro Inc.'s online selling partner.


Similar deals with other manufacturers are likely, and membership fees are a possible future source of revenue for Onsale atCost, said Kaplan.


With the competition online always a single mouse click away, Onsale aims to create an everyday low price image for Onsale atCost similar to cash-and-carry membership clubs like Costco. That way, consumers will be less likely to shop around.


"When you go into a Costco, you just assume that these people are giving you an everyday low price," said Kaplan. "We want that Costco image."


On Feb. 1, Onsale is launching a branding campaign on- and off-line under the headline "0 % Off Everyday" to highlight the company's everyday-low-price strategy.
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