Start-Up Shoots for Profits Through CD Swaps

With Net-only retailers facing stock market decimation amid “expert forecasts” that most of them will cease to exist this year, dot-com start-ups face an unusual new challenge when they deal with venture capitalists: They have to explain how they'll eventually make a profit. Kevin Wells and Howard Schneider think they've found a way.

The two co-founded SwapIt, a compact disc exchange Web site they introduced this week. Chairman/Chief Marketing Officer Wells and President Schneider sold their backers on the idea of creating a place online where people can send their used CDs for credit, then order from an inventory of used CDs that SwapIt fulfills centrally. The venture funding came in December.

“[Our backers] thought it was a really interesting business model … where it's not really about inventory that we paid for,” Wells said. “It's about inventory that other people have sent in and received essentially what amounts to a store credit.” He projects a profit in 2001.

And here's the part that might cause proprietors of used CD shops in college towns throughout the United States to look askance at SwapIt: The Maynard, MA, company doesn't mark up the CDs it buys from music enthusiasts. The buy price always equals the sell price. Instead, SwapIt will bring in most of its money through an unchanging $2 transaction fee it charges buyers for each CD.

Other online trading services exist, but Wells drew a line between SwapIt and firms that link individual swappers directly to one another. Wells believes trades with strangers aren't as reliable as SwapIt's centralized system.

“We do person-to-warehouse trading,” Wells said. “With this person-to-person trading stuff, the flake factor can be huge.”

Roughly, 40 percent of SwapIt's revenue is slated to come from banner advertising that targets the site's registered users based on what they trade in and out. People who sign on to the program enter basic demographic information and are asked to submit general music preferences.

“Every time you swap in the Grateful Dead and you swap out R.E.M., certainly, we can target from a demographic and psychographic point of view,” Wells said. SwapIt plans to partner with an unnamed collaborative filtering firm in the third quarter, and the first commercial banners are set to run at the beginning of May. The firm has signed up 42,000 registered users in a little less than two weeks.

Obviously, the big challenge for an operation like SwapIt's is on the back end. Consumers who rummage through their music collections for trading fodder look up their CDs' value in “SwapIt bucks” on the company's database at SwapIt lets users print out a packing list detailing their CDs and a prepaid mailing label. Consumers can ask for packaging if they wish.

Those CDs go to a SwapIt warehouse. After the company has the CDs on hand — and assuming they all work properly — SwapIt credits consumers' accounts. The company signed an agreement with DSC Logistics, Des Plaines, IL, as its fulfillment partner.

The company began erecting drop boxes at universities in the Boston area last week. The first was at the Massachusetts Institute of Technology student center. Wells claims SwapIt will have hundreds on campuses by September. A deal with two major theater chains is in the works as well. Some boxes will hold only packaging material; others will be true drop-and-ship boxes. SwapIt struck a deal with Corporate Express to pick up CDs from the boxes.

SwapIt also brings in money in the form of promotion dollars from companies that want to reach the firm's largely college-age demographic slice. The company stages music concerts as membership drives.

SwapIt plans to begin exchanging DVDs and computer games in June for higher transaction fees.

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