Pets.com – a classic example of product development failure

Reflecting back on the noughties (2000-2009) there are plenty of high profile cases of businesses built with high expectations but which failed to deliver. Many of these are examples of products being developed with little or no understanding as to whether or not there was a market demand for it.

In this post I analyse the much publicised example of the dot-com disaster Pets.com.

Build it and they will come… won’t they?

An all too common error at all levels of business from small garage inventors to mega corporations is a tendency to create products and services in a state of isolation and then task marketing and sales teams to “go out and find a market”. It’s quite an insane approach when you think about it. It would be like gluing a toaster onto a skateboard, calling it the Roadtoaster 5000 and then asking a friend to find a few thousand people who’d like to buy it.

There may be some anomalies, but the vast majority of successful products are developed following an analysis of a market – to identify if there are any needs or problems that people are facing, how important these needs are, how many of these people there are, if they would actually pay for something that meets their needs, if any competitors are already serving those needs and what it would take to offer a more compelling proposition than them.

Throw in a bit of basic segmentation, targeting and positioning and you would then have the beginnings of a business case to then look into developing a product to meet those needs. That in itself is a multi-step process because it may not be financially viable or even technically possible to meet the needs.

In short: Don’t build a product and then look for a market to sell it into. Look for a valid market requirement or need first. Then you can go about developing a product.

It’ll make squillions

Launched in August 1998, Pets.com was created to sell pet food and accessories via the internet. The premise was that you could “buy online and cut out the middleman” and “take advantage of Pets.com’s strong buying power”. Users of the site could browse through different categories, choose products they like and have them conveniently delivered to their home. Think Amazon’s original premise – books – but for pet products.

Interesting concept right? Sure, but Pets.com did no market research before launching. They made a lot of big assumptions: that pet owners would want to buy online and knew how to (remember, this was 1998); that selling pet products alone was compelling enough (as opposed to say an online supermarket which could sell pet supplies and other groceries); that people wanted to have such pet supplies delivered and were happy to wait a few days, rather than just driving down to the shops and getting it now.

But market research and validation of ideas seemed to be unimportant back in the heady early days of the information superhighway. Within a year of launch it had been acquired by venture capital firm Hummer Winblad (who amazingly still list Pets.com on their timeline of acquisitions!) and industry executive Julie Wainright. They even got Amazon.com on board as an investor.

Here’s the product – start marketing now!

With cash in the bank and fire in their bellies, Pets.com’s owners spent big in marketing communications and developed a brand around a sock puppet character that was regarded as either hugely entertaining or incredibly irritating depending on whom you spoke to.

They then poured cash into a massive advertising campaign, launched in January 2000 with a Superbowl TV commercial with a media price tag of $1.2 million. This was followed by intense online, print, television and radio advertising as well as a massive publicity push that saw the Sock Puppet make an appearance in the annual Macy’s Thanksgiving Parade.

Awareness skyrocketed. Everyone was talking about Pets.com. The site was hit with traffic as people began to place orders. A month later Pets.com went out and raised over $80 million dollars in its IPO.

There must have been a lot of back patting and happy Friday afternoon drinks. Pets.com was on a roll. The money would surely start pouring in, wouldn’t it?

A flawed business model

Pets.com’s owners soon noticed some issues. They discovered that demand wasn’t anywhere near as high as they had estimated. They may have been perplexed – why wasn’t Joe Sixpack in Suburbia placing orders? Didn’t he realise how awesome Pets.com was?

Pets.com had obviously not heard of the simple AIDA model (Awareness -> Interest -> Desire -> Action). Their massive marketing campaign had certainly generated a lot of Awareness and some Interest. But it wasn’t translating into sufficient Desire and certainly not to enough Action. Not enough people were ordering products and those that did were ordering only small amounts.

Had Pets.com actually done some research and investigation it could have known this in advance. Pets.com did not offer a compelling enough value proposition – there was simply no market requirement for home delivered pet food.

Whilst this meant revenues were much lower than expected, it also meant that costs were higher than necessary. Pets.com had invested in massive warehousing facilities to store all the dog food they figured they’d sell. This was a fixed cost that could not be avoided and it made a serious dent in their sales profitability. To make things worse, Pets.com went so far as to offer discounted and even free delivery which given the physical size and weight of the product was hugely expensive.

Sales did grow due to aggressive pricing and the massive marketing spend, but this only meant that Pets.com was losing money on most sales. The model was unsustainable. It was argued that this was just the nature of building a new business but even a fifth grader running a lemonade stand knows you need to charge more than you pay otherwise you won’t be in business long.

RIP Pets.com

In November 2000, Pets.com folded after having burned through $300 million in less than two years. Over 300 people lost their jobs and the site was shut down. CEO Julie Wainright said in a statement ”It is well known that this is a very, very difficult environment for business-to-consumer Internet companies. With no better offers and avenues effectively exhausted, we felt that the best option was an orderly wind-down with the objective to try to return something back to the shareholders.”

Whilst it was a high profile example of dot-com foolishness it was not an isolated occurrence. It’s still astounding that so much money was lost at the time. It’s hard to accept the argument that people simple overestimated the potential of the internet. Sure, that may have happened but Pets.com’s entire business model was flawed with apparently no real understanding of some very basic business models (i.e. you have to make more money than you spend!).

What would a product manager do?

It’s unlikely that we’ll see this sort of extreme silliness again. To be fair, over the past ten years a lot of niche specialist pet supply stores have started up but they operate at a much more scaled down level and have focused their product offerings and services on specific market segments.

As outlined at the beginning of the article I still see many examples of products being developed with no preliminary research, analysis or investigation to see if there is actually going to be any need for the product. This inevitably leads to wasted money, time and effort.

But it doesn’t have to be this way. Once again, the lesson of the story is simple:

Don’t build a product and then look for a market to sell it into. Look for a valid market requirement or need first. Then you can go about developing a product.

NOTE: This blog post of mine was originally published on the brainmates website. brainmates provides product management and marketing consulting and training services for leading organisations in a range of industries. And I work there so check them out!

[Via http://paulalexgray.wordpress.com]