NEW YORK — Bill Gross, chairman/CEO of Internet incubator idealab!, had a check-list for online marketers attending the Jupiter Online Consumer Forum in New York yesterday: Find a big unmet need, invent a new business model, think out of the box and assemble a good team of people.
But the Pasadena, CA-based entrepreneur was particularly riveted by the idea of new Internet business models, even in an already cluttered Internet market.
“A new business model scales like crazy,” Gross said in his keynote address. “A new business model doesn't have some of the limiting scaling problems that a typical, ordinary business would.”
Most online businesses currently follow the 'buy low, sell high' model or add a mark-up to the cost price, he said. This mentality poses a problem.
“So, everybody is competing in that business model very efficiently and there's not very much what you'd do for margins,” Gross said.
The four-year-old idealab offers technical, creative and business help to online start-ups and has helped spawn companies like eToys, WeddingChannel.com, cooking.com, CarsDirect.com and GoTo.com, which it takes a negotiated equity stake in return.
A unique business model is vital to success, Gross told attendees. He cited GoTo as an example. Idealab supported the online search engine's birth in exchange for equity. Gross thought GoTo’s business model was particularly creative because it searched on price.
“When we first introduced GoTo two years ago, people thought we were stupid,” Gross said. “We let the market [and] the media metrics to actually make results become more relevant than having a huge editorial team because we felt price was the best filter.”
Since other online services were leery of following suit, GoTo had a year's lead time before others incorporated price-based searches.
The team also wasn’t deterred by the late launch of GoTo in the midst of competition from established portals or search engines. On the contrary, GoTo’s builders were emboldened by the service's unique offering to online consumers.
“A lot of times competitors think that it's dumb and they don't even want to try and compete,” Gross said. “Sometimes you can patent the business model as the
case was with Priceline. We need to see how it holds up. I don't like to rely on patents for protection for your business, but they don't hurt.”
Out-of-the-box thinking is most crucial for a new business model's success, Gross said.
A case in point is CarsDirect, another idealab-supported direct-to-consumer auto retailer.Most people were skeptical that consumers would buy a big-ticket item like a car online unseen. Such negative feedback did not stymie Gross.
He felt that a back-end infrastructure and auto relationships could be built after a dry run. Based on the entrepreneur's advice, the site went live. It copied other popular consumer sites, with car configurations, color options, and an array of brands and real-time pricing.
Little did the online visitor know that a CarsDirect executive was busy personally answering all queries on the site. And it was really rudimentary: The executive entered prices of cars by referring to a book.
Within a day, CarsDirect had sold five cars, including three Porsche Boxsters. To fulfill the orders, the company promptly went out and bought those vehicles from a local auto dealership. It even swallowed a loss on the invoice price.
“I told them to take the site down,” Gross said. But he had proved a point. If the service was unique, met a consumer need and creatively executed, it was viable.